10-K 1 v302411_10k.htm FORM 10-K

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2011

OR

  

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

For the transition period from to

Commission File No. 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)

 

Registrant's telephone number, including area code: (203) 573-2000

 

Securities registered pursuant to Section 12(b) of the Act: 

 

  Title of each class Name of each exchange on which registered
     
  Common Stock, $0.01 par value New York Stock Exchange
     
  Securities registered pursuant to Section 12(g) of the Act: NONE

  

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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.                                                                       Yes x   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 this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).             Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

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 “accelerated filer,” “large accelerated file” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check off):

 

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)

 

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

  

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed as of June 30, 2011, based on the value of the closing price of these shares as quoted on the New York Stock Exchange was $1.8 billion.

 

The number of voting shares of Common Stock of the registrant outstanding as of January 31, 2012 was 96.3 million.

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 10, 2012 are incorporated by reference into Part III.

 

 
 

 

TABLE OF CONTENTS PAGES
   
PART I 2
   
Item 1: Business 2
   
Item 1A: Risk Factors 15
   
Item 1B: Unresolved Staff Comments 24
   
Item 2: Properties 24
   
Item 3: Legal Proceedings 26
   
Item 4: (Removed and reserved) 26
   
PART II 27
   
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27
   
Item 6: Selected Financial Data 29
   
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
   
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 54
   
Item 8: Financial Statements and Supplementary Data 55
   
Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 112
   
Item 9A: Controls and Procedures 112
   
Item 9B: Other Information 112
   
PART III 113
   
Item 10: Directors, Executive Officers and Corporate Governance 113
   
Item 11: Executive Compensation 114
   
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 114
   
Item 13. Certain Relationships and Related Transactions, and Director Independence 114
   
Item 14: Principal Accountant Fees and Services 114
   
PART IV 115
   
Item 15. Exhibits and Financial Statement Schedules 115
   
SIGNATURES 118

 

1
 

 

Note About Forward-Looking Statements

 

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Business”, “Risk Factors” and “Management’s Discussion and Analysis.” These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (See Part I, Item 1A of this Form 10-K). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

PART I

 

Item 1: Business

 

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.

 

General

 

We are a leading diversified global developer, manufacturer and marketer of performance-driven engineered specialty chemicals. Most of our products are sold to industrial manufacturing customers for use as additives, ingredients or intermediates that add value to their end products. Our agrochemical products are sold through dealers and distributors to growers and others. Our pool, spa and household chemical products are sold through local dealers, large retailers, independent retailers and mass merchants to consumers for in-home and outdoor use. Our operations are located in North America, Latin America, Europe and Asia. In addition, we have important joint ventures primarily in the United States and the Middle East, but also in Asia and Europe. We are committed to global sustainability through “greener technology” and developing engineered chemical solutions that meet our customers’ evolving needs. For the year ended December 31, 2011, our global net sales were $3 billion. As of December 31, 2011, our global total assets were $2.9 billion.

 

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 our specialty chemical business through acquisitions in the United States and Europe, including the 1996 acquisition of Uniroyal Chemical Company, Inc., the 1999 merger with Witco Corporation and the 2005 acquisition of Great Lakes Chemical Company, Inc. (“Great Lakes”).

 

Our principal executive offices are located at 1818 Market Street, Suite 3700, Philadelphia, Pennsylvania 19103 and at 199 Benson Road, Middlebury, Connecticut 06749. Our telephone number in Connecticut is (203) 573-2000. Our internet website address is www.chemtura.com. We make available free of charge on or through our internet website (www.chemtura.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish to, the Securities and Exchange Commission.

 

Our Corporate Governance Principles, Code of Business Conduct and charters for our Audit, Compensation, Nominating & Governance, Finance & Pension and Environmental, Health & Safety Committees are available on our website and free of charge to any stockholder who requests them from the Corporate Secretary at Chemtura Corporation, 199 Benson Road, Middlebury, CT 06749. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part of this Annual Report.

 

2
 

 

OUR COMPETITIVE STRENGTHS

 

We believe our key competitive strengths are: 

 

·Our Key Businesses Have Industry Leading Positions: Many of our key businesses and products hold leading positions within the various industries they serve. We believe our scale and global reach in product development and marketing provide us with advantages over many of our smaller competitors.

  

Operating Segment   Business Component   Industry Position / Commentary  
           
Industrial Performance Products   Petroleum Additives  

• Global manufacturer and marketer of high-performance lubricant additive components and synthetic lubricant base-stocks and synthetic finished fluids

 

• A world leader in high-performing calcium sulfonate specialty greases and phosphate and polyol ester based fluids

 
           
    Urethanes   • A global leader in the development and production of  hot cast elastomer pre-polymers  
           
    Plastic Antioxidants   • A global leader in the development and production of  additives for polyolefin and other engineered plastics  
           
Industrial Engineered Products   Great Lakes Solutions   • One of the three largest developers and manufacturers of bromine and bromine-based products  
           
    Organometallics   • One of the three largest developers and manufacturers of organometallic compounds, that have applications in catalysts, surface treatment and pharmaceuticals  
           
Consumer Products   Consumer Products   • One of the two largest global marketers and sellers of recreational water products used in pools and spas  
           
Chemtura AgroSolutions  

Chemtura

AgroSolutions

  • A leading niche developer and manufacturer of seed treatments, fungicides, miticides, insecticides, growth regulants and herbicides  

 

Broad Diversified Business:

 

Geographic diversity. Our worldwide manufacturing, sales and marketing network enables us to serve the needs of both local and global customers worldwide. As of December 31, 2011, we operated 31 manufacturing facilities in 14 countries. For the year ended December 31, 2011, 45% of our net sales were generated in the United States and Canada, 30% from Europe and Africa, 20% from Asia/Pacific and 5% from Latin America. We market and sell our products in more than 100 countries, providing the opportunity to develop new markets for our products in higher-growth regions. We have built upon our historical strength in the United States and Europe to expand our business geographically, thereby diversifying our exposure to many different economies.

  

3
 

 

GEOGRAPHIC INFORMATION

 

 

Product and industry diversity. We are comprised of a number of distinct businesses, each of which is impacted by varied industry trends. Additionally, our business portfolio serves diverse industries and applications, thereby providing us with further diversification.

 

Diversified customer base. We have a large and diverse global customer base in a broad array of industries. No single customer comprises more than ten percent of our consolidated 2011 net sales.

 

Unique Industry Positions: We believe our businesses possess significant differentiation within their respective industry segments. Some of our businesses are vertically integrated into key feedstocks and others have strong brand recognition, long lead time product registrations or technical and formulatory know-how. We believe these attributes are difficult to replicate and allow us to attract customers looking for consistent performance, reliability and cost-effective results, and are distinct competitive advantages. Examples include:

 

Our Industrial Engineered Products segment has extensive brine fields in Arkansas from which we extract brine to produce bromine, which is used as a building block for products such as flame retardants.

 

Our Industrial Performance Products segment participates in a production joint venture that produces cost competitive alkylated diphenylamine, a building block for our Naugalube® antioxidants used in lubricants. This segment also develops urethanes, the production of which is enhanced by our technical and formulatory know-how that permits us to engineer our products to meet specific customer needs and antioxidants, for which we are the only producer of such products in the Middle East, allowing us to offer superior service and security of supply to the region’s fast-growing polyolefin industry.

 

Our Consumer Products segment benefits from well-established brand names as well as registrations and proprietary products.

 

Our Chemtura AgroSolutions segment is well experienced in obtaining the required registrations for its products in each country in which they are sold. Once obtained, these registrations provide an exclusive right to use the active compound upon which the product is based for the specified crop in that country or region for a number of years.

 

4
 

 

Well Positioned to Grow in Emerging Markets: Our businesses’ product portfolios have positioned us to benefit from high growth regions in the future. We derived 25% of our revenues during 2011 from key high growth regions including Asia/Pacific and Latin America. We will continue to invest in faster growing regions as their polymer production increases, their manufacturing of electronic products expands, their automotive industries build vehicles that meet emission standards such that they can be exported to western markets, and their growers seek to increase the exports of their produce. There are a limited number of suppliers that can supply the products or provide the technical support that customers in these regions require, giving us the opportunity to capture this growth in demand for our products. Additionally, we are strongly positioned to supply the polyolefin industry in the Middle East through our antioxidants joint ventures in Saudi Arabia. We are negotiating strategies to supply organometallic products in Saudi Arabia which produces components for polymerization catalysts in the region. We also participate in a joint venture within Asia that produces polymer antioxidants and inaugurated a joint venture in Korea with UP Chemicals for the regional manufacturing of high purity organometallics serving the optoelectronic industry for the production of light emitting diodes (“LEDs”).

 

Focused, Experienced Management Team: We are led by Craig A. Rogerson, our Chairman, President and Chief Executive Officer. Mr. Rogerson holds a chemical engineering degree from Michigan State University and has over 32 years of operating and leadership experience in the specialty chemicals industry. Mr. Rogerson is supported by a senior management team that has extensive operational and financial experience in the specialty chemicals industry. Our senior management team is focused on creating a culture of performance and accountability that can leverage the global economic recovery and the long-term trends in the industries we serve to drive profitable revenue growth. For more information on our executive officers, see Item 10, Directors, Executive Officers and Corporate Governance.

 

Our Strategy

 

Our primary goal is to create value for our stakeholders by driving profitable revenue growth while continuing to manage our costs. We will develop and engineer new products and processes, exploit our global scale for regional growth and manage our portfolio of specialty chemical businesses. Our efforts are directed by the following key business strategies:

 

·Technology-Driven Growth through Industry Focused Innovation. As a specialty chemical developer and manufacturer, our competitive strength lies in continually developing and engineering new products and processes that meet our customers’ changing needs. We are investing in innovation to strengthen our new product pipelines and will license or acquire technologies to supplement these initiatives. We focus on the development of products that are sustainable, meet ecological concerns and capitalize on growth trends in the industries we serve.

 

·Growth Expansion in Faster-Growing Regions through Building Global Scale. We are building our local presence in the faster growing regions through sales representation, technical development centers, joint ventures and local manufacturing. We empower our regional teams to serve their growing customer base and will supplement these efforts through “bolt-on” acquisitions that fulfill our goals for our portfolio. We exploit our global scale by sharing service functions and technologies that no one region or business could replicate on its own while utilizing our regional presence to lower raw material costs.

 

·Performance-Driven Culture. We believe we have outstanding people who can deliver superior performance under strong, experienced leaders who instill a culture of accountability. We expect accountability on safety, environmental stewardship, compliance with laws, customer commitments and performance. We are focused on understanding the needs of our customers and meeting such needs by efficiently executing their orders and delivering technology based solutions that meet their requirements to earn the position as their preferred supplier. We measure our performance against benchmarks and metrics using statistical analysis and drive operational excellence through continuous improvement.

 

·Portfolio and Cost Management. We will continue to actively manage our portfolio of global specialty chemical businesses to maximize their value. We are intent on creating a focused portfolio of global specialty chemical businesses with sustainable competitive advantages and growth that serve the electronics and energy, transportation, and agriculture industries. Leveraging global demographic and technology trends and our in-depth knowledge and expertise that provide us with the “right to play” in these industries, we will drive value-accreting growth fueled by our focus on innovation and the faster growing regions. As we build this portfolio we will continue to increase the differentiation of our products while pruning or exiting underperforming products and managing costs.

 

5
 

 

Our Business and Segments

 

Information as to the sales, operating income, depreciation and amortization, assets, capital expenditures and earnings on investments carried on the equity method attributable to each of our business segments during each of our last three fiscal years, as well as certain geographic information, is set forth in Note 20 - Business Segments in our Notes to Consolidated Financial Statements.

 

The table below illustrates each segment’s net sales for the year ended December 31, 2011 as well as each segment’s major products, end-use markets and brands.

 

    Industrial    Industrial   Consumer   Chemtura
    Performance Products   Engineered Products   Products   ArgoSolutions
                 
2011 Net Sales   $1,358 million   $869 million   $422 million   $376 million
                 
Key Products  

•  Synthetic Lubricants

•  Lubricant Additives

•  Urethanes

•  Antioxidants

•  UV Stabilizers

•  Rubber Additives

 

•  Brominated Performance Products

•  Flame Retardants

•  Fumigants

•  Organometallics

 

 

•  Swimming Pool & Spa Chemicals

•  Cleaning Products

 

•  Seed Treatment

•  Fungicides

•  Miticides

•  Insecticides

•  Growth Regulants

•  Herbicides

                 
Major End-Use Markets  

•  Adhesives

•  Automotive

•  Building and Construction

•  Coatings

•  Consumer Products

•  Engine and Gear Oils

•  Industrial Oils and Greases

•  Lubricants

•  Packaging

•  Sealants

 

 

•  Agriculture

•  Automotive

•  Biocides

•  Building and Construction

•  Coatings

•  Consumer Durables

•  Electronics

•  Fine Chemical

•  Pharmaceuticals

•  Energy

o    Mercury Control

o    Oilfield

o    Solar

•  Paints and Polymers

 

•  Cleaners

•  Pools and Spas

 

 

•  Agriculture

•  Public and Animal Health

 

                 
Key Brands  

Adiprene Duracast®

Adiprene®

Anderol®

Anox®

Durad®

Fomrez®

Hatcol®

Hybase®

Lobase®

Lowilite™

Lowinox®

Naugalube®

Naugard®

Polybond®

Reolube™

Royaltuf®

Royco®

Synton®

Trixene®

Ultranox®

Vibrathane®

Weston®

Witcobond®

 

AXION®

Emerald™

Firemaster®

Fyrebloc®

GeoBrom®

Kronitex®

Ongard®

Pyrobloc®

Reofos®

Smokebloc®

Thermoguard®

Timonox®

 

 

Aqua Chem®

BAYROL®

BioGuard®

Cristal™

Greased Lightning®

Miami™

Mineral Springs®

Omni®

Pool Time®

Pool Essential®

Poolbrite®

ProGuard®

Spa Essentials®

SpaGuard™

SpaTime®

Sun®

The Works®

 

Acramite® Royal MH-30™

Anchor™ Royaltac®

Blizzard® Signal®

B-Nine® Starmite®

Casoron® Temprano®

Comite® Terraguard®

Dimilin® Terramaster®

Elastic® Vitavax®

Enhance® Viticure®

Firestorm®

Floramite®

Flupro™

Grain Guard®

Micromite®

Moolah®

Off-Shoot T®

Omite®

Pantera™

Panarex®

Percutio®

ProCure®

Rancona®

Rimon®

 

6
 

 

Industrial Performance Products

 

The Industrial Performance Products segment develops, manufactures and sells performance specialty chemicals. Industrial Performance Products include:

 

·petroleum additives that provide detergency, friction modification and corrosion protection in automotive and industrial lubricants and greases, synthetic finished lubricants, synthetic base-stocks and greases used in aviation, industrial and refrigeration applications;
·castable urethane pre-polymers engineered to provide superior abrasion resistance and durability in many industrial and recreational applications;
·polyurethane dispersions and urethane pre-polymers used in various types of coatings such as wood floor finishes, glass fiber coatings and textile treatments;
·plastic antioxidants additives that inhibit the degradation of polymers caused by air and heat during manufacture and use;
·UV stabilizers additives that protect materials against the harmful effects of UV light; and

·rubber additives products that protect elastomers and rubber compounds such as tires from cracking and deteriorating from exposure to ozone as well as providing resistance to oxygen and heat degradation.

 

These products are sold directly to manufacturers through distribution channels.

 

The Industrial Performance Products segment had net sales of $1,358 million for 2011, $1,223 million for 2010 and $999 million for 2009. This segment represented 45%, 44% and 43% of our total net sales in 2011, 2010 and 2009, respectively. The major product offerings of this segment are described below.

 

Petroleum Additives

 

We are a global manufacturer and marketer of high-performance additive components used in transport and industrial lubricant applications including alkylated diphenylamines antioxidants (“ADPAs”), which are marketed as Naugalube® and used predominately in automotive lubricants. These additives play a critical role in meeting rising regulatory mandated standards for engine performance and emissions as well as consumer demand for improved gas mileage and longer service intervals. The component product line also includes overbased and neutral calcium sulfonates and overbased magnesium sulfonates used in motor oils and marine lubricants. These sulfonates, marketed as Hybase® and Lobase®, are oil-soluble surfactants whose properties include detergency and corrosion protection to help lubricants keep car, truck, and ship engines clean with minimal wear. A special grade of overbased magnesium sulfonate has been developed as a heavy fuel additive.

 

We provide a variety of highly specialized, high value synthetic lubricant base-stocks including our high-viscosity polyalphaolefins, marketed as Synton®, and our broad portfolio of esters marketed as Hatcol®. These products are used in the production of synthetic lubricants for automotive, refrigeration, aviation, and industrial applications. We also manufacture and sell high performing calcium sulfonate specialty greases and phosphate ester based fluids and additives for power generation fluids and for use in anti-wear agents in a variety of lubricants.

 

We are also a specialty supplier of high performance finished synthetic lubricants serving the aviation and industrial markets. Our product line has extensive original equipment manufacturer approvals and is marketed under our Anderol® and Royco® brands as well as for private label customers.

 

On July 30, 2010, we completed the sale of our natural sodium sulfonates and oxidized petrolatum product lines within our petroleum additives business to Sonneborn Inc., an affiliate of private investment firm Sun Capital Partners, Inc.

 

Urethanes

 

We are a leading supplier of high-performance cast urethane pre-polymers with more than 200 variations in our product offerings. Our urethane pre-polymers offer high abrasion resistance and durability in industrial and performance-specific applications. These characteristics allow us to market our urethane pre-polymers to niche manufacturers where such qualities are imperative, including for industrial and printing rolls, mining machinery and equipment, mechanical goods, solid industrial tires and wheels, and sporting and recreational goods, including skateboard and roller skate wheels.

 

7
 

 

Adiprene ® and Vibrathane® urethane pre-polymers are sold by our direct sales force and through distribution partners in the United States, Canada, Australia, Europe, Latin America and the Far East, and are used in cast elastomer applications where durability and chemical resistance is required. Our products are used in applications as diverse as polishing pads for the semiconductor industry to high performance screens for the mining industry. Customers in each region are serviced by a dedicated technical staff whose support is a critical component of the product offering. We believe the relatively low capital requirements of this business provide us with the ability to operate cost effectively. Lastly, our development capabilities allow us to differentiate ourselves in these markets by tailoring our products to the specialized needs of each customer application, which sets us apart from our competitors.

 

Our urethane chemicals business provides products for a variety of end uses and applications. The urethane chemicals business consists primarily of three product lines: Fomrez® saturated polyester polyols, Witcobond® polyurethane dispersions, and Trixene® blocked isocyanates. Fomrez® polyester polyols are employed in industrial applications such as flexible foam for seating. Our Witcobond® polyurethane dispersions are sold to a larger and more diverse customer base primarily for applications such as glass fiber sizing, wood floor coatings and ballistics protection applications. Our Trixene® product offering includes blocked isocyanates and specialty polymer systems used in a wide range of coating, adhesive, sealant and elastomer applications. Our focus on customer intimacy in the urethane chemicals business enables us to tailor specific product offerings to meet our customers’ most demanding application requirements.

 

Antioxidants

 

Our antioxidants and UV stabilizer business is comprised of five product families which operate from worldwide manufacturing facilities to meet the needs of the large global petrochemical producers as well as regional compounders. We are one of the world’s largest suppliers of plastic antioxidants. These additives enables today’s producers of polymers and polymer parts to withstand the requirements of the most demanding processing equipment and end user applications. Our UV stabilizers additives are used to protect polymers against the harmful effects of UV light. Applications include agricultural films, automotive coatings and photovoltaic films. The rubber additives products protect elastomers and rubber compounds such as tires from cracking and deteriorating from exposure to ozone as well as providing resistance to oxygen and heat degradation. Our inhibitors prevent polymerization in production of certain monomers enabling our customers to operate their plants efficiently and safely. The polymer modifier products are used as coupling agents and impact modifiers for polymers (and increasingly bioplastics) for use in engineering applications in markets such as automotive and building and construction. Incorporating such additives into resin systems improves the durability and longevity of plastics used in packaging, consumer durables, automotive parts and electrical components. Through our proprietary technology, we are able to offer “powder free” solutions so our customers can avoid the hazards of working with powders in a chemical environment. At the same time, we are proficient in blending a variety of these materials into specialized formulations uniquely tailored to customer specific end-use requirements.

 

Industrial Engineered Products

 

We are a global leader in manufacturing and selling of engineered specialty chemicals utilized in the plastics, agriculture, fine chemicals, oil and gas, building and construction, electronics, mercury control, solar energy, pharmaceutical and automotive industries. Our products include flame retardants, bromine and bromine intermediates, catalyst components, fumigants, surface treatments and completion fluids for oil and gas extraction. These products are sold across the entire value chain ranging from direct sales to monomer producers, polymer manufacturers, compounders and fabricators, fine chemical and pharmaceutical manufacturers, photovoltaic panel and LED producers and oilfield service companies to industry distributors.

 

The Industrial Engineered Products segment had net sales of $869 million for 2011, $728 million for 2010 and $512 million for 2009. This segment represented 29%, 26% and 22% of our total net sales in 2011, 2010 and 2009, respectively. The major product offerings of this segment are described below.

 

Great Lakes Solutions

 

Great Lakes Solutions is a global and innovative leader in safe and cost-efficient flame retardant products and solutions for use in applications such as electronic components, electrical enclosures and building products, including insulation and furniture foam, and automotive. We also specialize in the manufacture and marketing of bromine, bromide intermediates and end products to chemical manufacturing and energy producing industries.

 

8
 

 

Great Lakes Solutions is committed to greener innovation targeting consumer electronics, furniture foam, more energy-efficient thermal insulation and the power industry. Great Lakes Solutions Emerald™ series of flame retardants is the result of our dedication to providing products that are innovative and reliable and also minimize the impact on the environment and human health without sacrificing performance or quality. Our GeoBrom® line of bromine and bromine derivative products is another example of greener innovation where we deploy our technology expertise to provide a solution to reducing mercury emissions from coal-fired power stations.

 

With sales, technology and manufacturing on three continents, Great Lakes Solutions is truly a global business with expanding footprint and services. Through our strategic geographic and operational initiatives, we have significantly expanded our ISO fleet capabilities. We are backwardly integrated to brine, a primary source of bromine and during 2009 to 2011 we invested approximately $100 million in infrastructure to increase the efficiency and reliability of our plants and pipelines. We are well positioned to support not only growth of our traditional industry segments but also to provide security of supply with expansion capability to our mercury control customers.

 

Fire kills thousands of people each year throughout the world, but many are spared because fires are slowed or never start due to the use of flame retardants. Great Lakes Solutions works tirelessly to advocate for increased fire safety standards in new and developing economies. Our operational excellence strategic initiatives in both North America and India will bring an improved, robust, cost-competitive and service-oriented footprint closer to our global customers.

 

Great Lakes Solutions is dedicated to providing bromine and phosphorus flame retardants and brominated performance products that are the most innovative and reliable. For close to a century, we have helped our customers to meet their current and future performance, safety and compliance requirements by refining and redefining our portfolio with new and improved products that maximize sustainability needs with a broad portfolio of products and solutions.

 

Organometallics

 

Organometallics are a special group of metals containing organic chemicals which play a significant role in a variety of industrial applications. Organometallics are essential components used to initiate the polymerization reactions that transform monomers into polymers. They are also used as precursors in glass coatings, in the production of semiconductors, LEDs and photovoltaic panels, as well as for the production of many pharmaceutical ingredients and as catalysts for curing certain paints and polymers.

 

Consumer Products

 

The Consumer Products segment develops, manufactures and sells performance chemicals to consumers for in-home and outdoor use. These chemicals include recreational water purification products sold under a variety of branded labels through local dealers and large retailers to assist consumers in the maintenance of their swimming pools and spas and branded cleaners and degreasers sold primarily through mass merchants to consumers for home cleaning.

 

Our pool and spa product lines consist of sanitizers, algaecides, biocides, oxidizers, pH balancers, mineral balancers and other specialty chemicals and accessories. Our primary channels of distribution are pool and spa dealers and mass-market retailers throughout North America, Europe, Australia and South Africa. We hold leading positions in both the North American and European pool and spa chemical markets and we plan to strengthen our position by expanding our dealer channels and presence with leading mass market retailers.

 

We also operate in the specialty and multi-purpose cleaners business with branded non-abrasive bathroom cleaners, glass and surface cleaners, toilet bowl cleaners, drain openers and rust and calcium removers, as well as a family of multipurpose cleaners. Our primary channels of distribution for specialty and multi-purpose cleaning products are through major national and regional retailers in the do-it-yourself, hardware, mass market, club and discount sectors.

 

The Consumer Products segment had net sales of $422 million for 2011, $458 million for 2010 and $457 million for 2009. This segment represented 14%, 17% and 20% of our total net sales in 2011, 2010 and 2009, respectively.

 

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Chemtura AgroSolutions

 

The Chemtura AgroSolutions segment focuses on specific target applications in six major product lines which include seed treatments, fungicides, miticides, insecticides, growth regulants and herbicides. We have developed our products for use on high-value target crops such as tree and vine fruits, ornamentals and nuts and for commodity row crops such as soybeans, oilseed rape and corn. Our dedicated sales force works with growers and distributors to promote the use of our products throughout a crop’s growth cycle and to address selective regional, climate, and growth opportunities. We expand our presence in worldwide targeted markets by developing or acquiring crop protection products and obtaining registrations for new uses and geographies where demand for our products and services has potential for growth. Our expertise in registering our product offerings and our diverse global position differentiates us from our competitors. We develop and sell our own products and we also sell and register products manufactured by others on a license and/or resale basis.

 

Our seed treatments are used to coat seeds in order to protect the seed during germination and initial growth phases. Seed treatment is an environmentally attractive form of crop protection involving localized use of agricultural chemicals at much lower use rates than other (foliar) agrichemical treatments. We anticipate growth in seed treatment resulting from the expanded use of higher value genetically modified seed.

 

Our fungicides are products that prevent the spread of fungi or plants in crops which can cause damage resulting in loss of yield and profit for growers. Our miticides (acaricides) are products that control a variety of mite pests on the crops. Our insecticides are products used against insect pests at different stages of the life cycle from egg and larvae to nymph and adult. They have both crop and public health applications. Our plant growth regulators are products used for controlling or modifying plant growth processes without severe phytotoxicity. Our herbicides are products used to control unwanted plants while leaving the crops they are targeted to treat relatively unharmed.

 

We work closely with our customers, distributors, and individual growers as part of an on-the-ground coordinated effort. We develop products in response to ongoing customer demands, drawing upon existing technologies and tailoring them to match immediate needs. For example, a grower’s crops may require varying levels of treatment depending on weather conditions and the degree of infestation. Our research and technology is therefore geared towards responding to threats to crops around the world as they emerge under a variety of conditions.

 

We benefit from nearly 50 years of experience in the field, along with over 2,000 product registrations in more than 100 countries. Our experience with registering products is a valuable asset, as registration is a significant barrier to entry, particularly in developed countries. Registration of products is a complex process in which we have developed proficiency over time. The breadth of our distribution network and the depth of our experience enable us to focus on profitable applications that have been less sensitive to competitive pricing pressures than broad commodity segments. This position allows us to attract licensing and resale opportunities from partner companies providing us new products and technologies to accompany our own existing chemistries.

 

We sell our products in North America through a distribution network consisting of more than 500 distributor outlets that sell directly to end use customers. Internationally, our direct sales force services over 2,500 distributors, dealers, cooperatives, seed companies and large growers.

 

The Chemtura AgroSolutions segment had net sales of $376 million for 2011, $351 million for 2010 and $332 million for 2009. This segment represented 12%, 13% and 14% of our total net sales in 2011, 2010 and 2009, respectively.

 

Sources of Raw Materials

 

Hydrocarbon-based and inorganic chemicals constitute the majority of the raw materials required to manufacture our products. These materials are generally available from a number of sources, some of which are foreign. We use significant amounts of chemicals derived from ethylene, propylene, benzene, iso-butane, palm and coconut oil, methanol, phosphorus and urea. In addition, chlorine, caustic, other petrochemicals and tin represent some key materials used in our chemical manufacturing processes. Major requirements for key raw materials are purchased typically pursuant to multi-year contracts. Large increases in the cost of such key raw materials, as well as natural gas, which powers some key production facilities, could adversely affect our operating margins if we are not able to pass the higher costs on to our customers through higher selling prices. While temporary shortages of raw materials we use may occur occasionally, key raw materials have generally been available. However, there can be no assurance that unforeseen developments (including markets, political and regulatory conditions) will not affect our raw material supplies, their continuing availability and their cost. For additional information related to these risks, see Item 1A. - Risk Factors.

 

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Seasonal Business

 

With the exception of the Chemtura AgroSolutions segment and the pool and spa product line in our Consumer Products segment, no material portion of any segment of our business is significantly seasonal. Our Chemtura AgroSolutions segment is seasonal in nature and corresponds to agricultural cycles within each respective region. Similarly, in the Consumer Products segment, approximately 85% of net sales are generated from our recreational water products business serving the North American and European regions. These markets generally record higher sales in the second and third quarters of each year.

 

Employees

 

We had approximately 4,500 full time employees at December 31, 2011.

 

Backlog

 

We do not consider backlog to be a significant indicator of the level of future sales activity. In general, we do not manufacture our products against a backlog of orders. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, we believe that backlog information is not material to understanding our overall business and should not be considered a reliable indicator of our ability to achieve any particular level of sales or financial performance.

 

Competitive Conditions

 

The breadth of our product offering provides multiple channels for growth and mitigates our dependence on any one market or end-use application. We sell our products in more than 100 countries. This worldwide presence reduces our exposure to any one country’s or region’s economy although a majority of our sales are in North America and Europe.

 

We have a broad customer base and believe that our products, many of which we customize for the specific needs of our customers, allow us to enhance customer loyalty and attract customers that value product innovation and reliable supply.

 

Product performance, quality, price, and technical and customer service are all important factors in competing in substantially all of our businesses.

 

We face significant competition in many of the industries in which we operate due to the trends toward global expansion and consolidation by competitors. Some of our existing competitors are larger than we are and may have more resources and better access to capital markets for continued expansion or new product development than we do. Some of our competitors also have a greater product range, are more vertically integrated or have better distribution capability than we do for specific products or geographical areas.

 

Research and Development

 

All of our businesses conduct research and development activities to increase competitiveness. Our businesses conduct research and development activities to develop new and to optimize existing production technologies, as well as to develop commercially viable new products and applications while also maintaining existing product registrations required by regulatory agencies around the world. Our research and development expenditures totaled $43 million in 2011, $42 million in 2010 and $35 million in 2009.

 

Intellectual Property and Licenses

 

We attach great importance to patents, trademarks, copyrights and product designs in order to protect our investment in research and development, manufacturing and marketing. Our policy is to seek wide protection for significant products and process developments on our major applications. We also seek to register trademarks extensively as a means of protecting the brand names of our products.

 

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We have approximately 2,200 United States and foreign granted patents and pending patent applications and approximately 4,400 United States and foreign registered and pending trademarks. Patents, trademarks, trade secrets in the nature of know-how, formulations, and manufacturing techniques assist us in maintaining the competitive position of certain of our products. Our intellectual property is of particular importance to a number of specialty chemicals we manufacture and sell. However, we do business in countries where protection may be limited and difficult to enforce. We are licensed to use certain patents and technology owned by other companies, including some foreign companies, to manufacture products complementary to our own products, for which we pay royalties in amounts not considered material, in the aggregate, to our consolidated results. Products to which we have such rights include certain crop protection chemicals.

 

Neither our business as a whole nor any particular segment is materially dependent upon any one particular patent, trademark, copyright or trade secret.

 

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.

 

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.

 

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

 

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.

 

Regulatory Matters

 

Chemical companies are subject to extensive environmental laws and regulations concerning, among other things, emissions to the air, discharges to land, surface, subsurface strata and water and the generation, handling, storage, transportation, treatment and disposal of hazardous waste and other materials. Chemical companies are also subject to other federal, state, local and foreign laws and regulations regarding health and safety matters.

 

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Environmental Health and Safety Regulation - We believe that our business, operations and facilities are being operated in substantial compliance, in all material respects, with applicable environmental, health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The ongoing operations of chemical manufacturing plants, however, entail risks in these areas and there can be no assurance that material costs or liabilities will not be incurred. In addition, future developments of environmental, health and safety laws and regulations and related enforcement policies, could bring into question the handling, manufacture, use, emission or disposal of substances or pollutants at facilities we own, use or control. These developments could involve potential significant expenditures in our manufacture, use or disposal of certain products or wastes. To meet changing permitting and regulatory standards, we may be required to make significant site or operational modifications, potentially involving substantial expenditures and reduction or suspension of certain operations. We incurred $12 million of costs for capital projects and $73 million for operating and maintenance costs related to environmental health and safety programs at our facilities during 2011. In 2012, we expect to incur approximately $20 million of costs for capital projects and $80 million for operating and maintenance costs related to environmental health and safety programs at our facilities. During 2011, we paid $37 million (which included $27 million related to pre-petition liabilities) to remediate previously utilized waste disposal sites and current and past facilities. We expect to spend approximately $19 million during 2012 to remediate such waste disposal sites and current and former facilities.

 

Pesticide Regulation - Our Chemtura AgroSolutions segment is subject to regulations under various federal, state, and foreign laws and regulations relating to the manufacture, sale and use of pesticide products.

 

In August 1996, Congress enacted the Food Quality Protection Act of 1996 ("FQPA"), which made significant changes to the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), governing U.S. sale and use of pesticide products and the Federal Food, Drug, and Cosmetic Act ("FFDCA"), which limits pesticide residues on food.  FQPA facilitated registrations and re-registrations of pesticides for special (so called "minor") uses under FIFRA and authorized collection of maintenance fees to support pesticide re-registrations. Coordination of regulations implementing FIFRA and FFDCA is now required. Food safety provisions of FQPA establish a single standard of safety for pesticide residue on raw and processed foods, require that information be provided through large food retail stores to consumers about the health risks of pesticide residues and how to avoid them, preempt state and local food safety laws if they are based on concentrations of pesticide residues below recently established federal residue limits (called "tolerances"), and ensure that tolerances protect the health of infants and children.

 

FFDCA, as amended by FQPA, authorized the Environmental Protection Agency (“EPA”) to set a tolerance for a pesticide in or on food at a level which poses "a reasonable certainty of no harm" to consumers.  The EPA is required to review all tolerances for all pesticide products.  Most of our products have successfully completed review, others are currently under review and other products will be reviewed under this standard in the future.

 

The European Union Commission has established procedures whereby all existing crop protection active ingredient chemicals commercially available in the European Union (the “EU”) are to be reviewed. Regulation 91/414 became effective in 1993 and the process was updated in 2007 and 2008. The original list of existing chemicals was prioritized and divided into 4 parts. We had four chemicals on the first list, three of which were successfully supported through the review, which results in inclusion onto Annex I of 91/414, while the fourth was withdrawn by us for commercial reasons and has since been re-submitted.  The remainder of our products will be reviewed in the future with the overall process expected to be completed by the end of 2012. The process may lead to full registration in member states of the EU or may lead to some restrictions or cancellation of registrations if it is determined that a product poses an unacceptable risk.

 

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Chemical Regulation  - In December 2006, the EU signed the Registration, Evaluation and Authorization of Chemicals (“REACh”) legislation.  This legislation requires chemical manufacturers and importers in the EU to demonstrate the safety of the chemical substances contained in products.  The effective date of the legislation was June 1, 2007 and it required all covered substances to be pre-registered by November 30, 2008.  Since December 1, 2008, no product containing covered substances can be manufactured in or imported into the EU unless the substances therein have been pre-registered.  The full registration of REACh will be phased in over the next several years.  The registration deadlines are as follows: 2010 for chemical substances manufactured or imported in excess of 1,000 metric tons per year and for substances deemed to be particularly harmful to humans or the environment, 2013 for substances manufactured or imported in the EU between 100 and 1,000 metric tons per year and 2018 for substances manufactured or imported in the EU in quantities greater than 1 metric ton per year.  The registration process requires expenditures and resource commitments to compile and file comprehensive chemical dossiers on the use and attributes of each chemical substance and to perform chemical safety assessments.  In addition, each registration phase carries with it a registration fee, which ranges from €31,000 per substance for high-risk, high tonnage band substances to €1,600 for substances registered in the lowest tonnage band and risk.  In 2008, we pre-registered approximately 1,100 substances and submitted approximately 2,100 pre-registration dossiers covering multiple affiliated legal entities.  In 2009, our total REACh related costs, including registration fees, were approximately $1 million.  In 2010, we registered 125 substances and our total REACh related costs, including registration fees, were approximately $8 million. In 2011, while we registered a few substances, we spent $5 million primarily on improving our REACh registration processes to reduce costs and risks associated with our 2013 registrations when we anticipate registering 119 substances. We anticipate REACh related costs of approximately $7 million in 2012, $5 million in 2013 and $7 million in 2014.  The cost estimates could vary based on data availability and cost.  The implementation of the REACh registration process may affect our ability to manufacture and sell certain products in the future.

 

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Item 1A: Risk Factors

 

The most significant risks that could materially and adversely affect our financial condition, results of operations or cash flows include, but are not limited to, the factors described below. Except as otherwise indicated, these factors may or may not occur and we cannot predict the likelihood of any such factor occurring.

 

The cyclical nature of the chemicals industry causes significant fluctuations in our results of operations and cash flows.

 

Our historical operating results reflect the cyclical and volatile nature of the supply and demand balance of the chemicals industry.  The chemicals industry has experienced alternating periods of inadequate capacity and supply, allowing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, overcapacity, corresponding declining utilization rates and, ultimately, declining prices and profit margins.  Some of the markets in which our customers participate, such as the automotive, electronics and building and construction industries, are cyclical in nature, thus posing a risk to us that is beyond our control. These markets are highly competitive, are driven to a large extent by end-use markets and may experience overcapacity, all of which may affect demand for and pricing of our products and result in volatile operating results and cash flows over our business cycle.  Future growth in product demand may not be sufficient to utilize current or future capacity.  Excess industry capacity may continue to depress our volumes and margins on some products.  Our operating results, accordingly, may be volatile as a result of excess industry capacity, as well as from rising energy and raw materials costs.

 

Increases in the price of the raw materials or energy utilized for our products may have a material adverse effect on our operating results.

 

We purchase significant amounts of raw materials and energy for our businesses. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of our operating expenses.  The prices and availability of the raw materials we utilize vary with market conditions and may be highly volatile.  Over the past few years, we have experienced significant cost increases in purchases of petrochemicals, tin, soybean oil, other raw materials and, our primary energy source (natural gas) which has had a negative impact on our operating results.

 

Although we have attempted, and will continue to attempt, to match increases in the prices of raw materials or energy with corresponding increases in product prices, we may not be able to immediately raise product prices, if at all.  Ultimately, our ability to pass on increases in the cost of raw materials or energy to customers is highly dependent upon market conditions. Specifically, there is a risk that raising prices charged to our customers could result in a loss of sales volume.  In the past, we have not always been able to pass on increases in the prices of raw materials and energy to our customers, in whole or in part, and there will likely be periods in the future when we will not be able to pass on these price increases. Reactions by our customers and competitors to our price increases could cause us to reevaluate and possibly reverse such price increases, which would negatively affect operating results.

 

Any disruption in the availability of the raw materials or energy utilized for our products may have a material adverse effect on our operating results.

 

Across our businesses, there are a limited number of suppliers for some of our raw materials and utilities and, in some cases, the number of sources for and availability of raw materials and utilities is specific to the particular geographic region in which a facility is located. It is also common in the chemical industries for a facility to have a sole, dedicated source for its utilities, such as steam, electricity and gas. Having a sole or limited number of suppliers may result in our having limited negotiating power, particularly during times of rising raw material costs. Even where we have multiple suppliers for a raw material or utility, these suppliers may not make up for the loss of a major supplier. Moreover, any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements. For some of our products, the facilities or distribution channels of raw material and utility suppliers and our production facilities form an integrated system, which limits our ability to negotiate favorable terms in supply agreements.

 

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In addition, as part of an increased trend towards vertical integration in the chemicals industry, other chemical companies are purchasing raw material suppliers. This is further reducing the available suppliers for certain raw materials.

 

If one or more of our significant raw material or utility suppliers were unable to meet its obligations under present supply arrangements, raw materials may become unavailable within the geographic area from which they are now sourced, or supplies may otherwise be constrained or disrupted, our businesses could be forced to incur increased costs for our raw materials or utilities, which would have a direct negative impact on plant operations and may adversely affect our results of operations and financial condition.

 

Decline in general economic conditions and other external factors may adversely impact our operations.

 

External factors, including domestic and global economic conditions, international events and circumstances, competitor actions and government regulation, are beyond our control and can cause fluctuations in demand and volatility in the prices of raw materials and other costs that can intensify the impact of economic cycles on our operations. We produce a broad range of products that are used as additives and components in other products in a wide variety of end-use markets. As a result, our products may be negatively impacted by supply and demand instability in other industries and the effects of that instability on supply chain participants. Economic and political conditions in countries in which we operate may also adversely impact our operations. For example, some countries in Central and Eastern Europe have been particularly adversely affected by the recent global financial crisis, rising government deficits and debt levels, protracted credit market tightness and other challenging European market conditions and could continue to negatively affect our businesses. Although our diversified product portfolio and international presence lessens our dependence on a single market and exposure to economic conditions or political instability in any one country or region, our businesses are nonetheless sensitive to changes in economic conditions. Accordingly, financial crises and economic downturns anywhere in the world could adversely affect our results of operations, cash flows and financial condition.

 

Competition may adversely impact our results of operations.

 

We face significant competition in many of the markets in which we operate due to the trend toward global expansion and consolidation by competitors.  Some of our existing competitors are larger than we are and may have more resources and better access to capital markets to facilitate continued expansion or new product development. Additionally, some of our competitors have a greater product range and distributional capability than we do for certain products and in specific regions. We also expect that we will continue to face new competitive challenges as well as additional risks inherent in international operations in developing regions. We are susceptible to price competition in certain markets in which customers are sensitive to changes in price. At the same time, we also face downward pressure on prices from industry overcapacity and lower cost structures in certain businesses. The further use and introduction of generic and alternative products by our competitors may result in increased competition and could require us to reduce our prices and take other steps to compete effectively. These measures could negatively affect our financial condition, results of operations and cash flows.  Alternatively, if we were to increase prices in response to this competition, the reactions of our competitors and customers to such price increases could cause us to reevaluate and possibly reverse such price increases or risk a loss in sales volumes.

 

Our inability to register our products in member states of the European Union under the REACh legislation may lead to some restrictions or cancellations of registrations, which could impact our ability to manufacture and sell certain products.

 

In December 2006, the European Union signed the REACh legislation. This legislation requires chemical manufacturers and importers in the European Union to demonstrate the safety of the chemical substances contained in their products via a substance registration process. The full REACh registration process will be phased in over the next several years. The registration process will require capital and resource commitments to compile and file comprehensive chemical dossiers regarding the use and attributes of each chemical substance manufactured or imported by Chemtura and will require us to perform chemical safety assessments. Successful registration under REACh will be a functional prerequisite to the continued sale of our products in the European Union market. Thus, REACh presents a risk to the continued sale of our products in the European Union should we be unable or unwilling to complete the registration process or if the European Union seeks to ban or materially restrict the production or importation of the chemical substances used in our products.

 

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Adverse weather or economic conditions could materially affect our results of operations.

 

Sales volumes for the products in our Chemtura AgroSolutions segment, like all agricultural products, are subject to the sector’s dependency on weather, disease and pest infestation conditions.  Adverse weather conditions in a particular region could have a material adverse affect on our Chemtura AgroSolutions segment. Additionally, our Chemtura AgroSolutions segment products are typically sold pursuant to contracts with extended payment terms in Latin America and Europe.  Customary extended payment periods, which are tied to particular crop growing cycles, render our Chemtura AgroSolutions segment susceptible to losses from receivables during economic downturns and may adversely affect our results of operations and cash flows.

 

Our pool and spa products in our Consumer Products segment are primarily used in swimming pools and spas.  Demand for these products is influenced by a variety of factors, including seasonal weather patterns.  An adverse change in weather patterns, such as unseasonably cold and wet summers, could negatively affect the demand for, and profitability of, our pool and spa products.

 

Demand for Chemtura AgroSolutions products is affected by governmental policies.

  

Demand for our Chemtura AgroSolutions segment products is influenced by the agricultural policies of governments and regulatory authorities, particularly in developing countries in Asia and Latin America, where we conduct business. Moreover, changes in governmental policies or product registration requirements could have an adverse impact on our ability to market and sell our products.

 

In all regions of the world there are directives, laws and/or regulations that require the testing and registration of all agrochemical products before they can be sold for application to crops. Each country appoints agencies responsible for the administration of these approval processes. Under these laws or when such laws and regulations are periodically changed the products that have been previously registered may be required to undergo a process of re-registration. The re-registration process frequently demands tests to be repeated to more modern and exacting standards or may even require completely new types of tests to be completed. These tests and processes for both new and existing agrochemical products can take significant time to complete and resources to perform, and may ultimately be unsuccessful in their objective of securing a registration of new products or re-registration of existing products. There is no assurance when an existing product requires re-registration that it will be approved for continuing use or all of its previously approved uses can be sustained. Globally, many of our products are currently subject to such re-registration processes which may result in products having their approval for sale withdrawn in some countries.

 

Current and future litigation, governmental investigations, prosecutions and administrative claims, including antitrust-related governmental investigations and lawsuits, could harm our financial condition, results of operations and cash flows.

 

We have been involved in several significant lawsuits and claims relating to environmental and chemical exposure matters, and may in the future be involved in similar litigation. Additionally, 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 with respect to our divested businesses. Some of these claims and lawsuits relate to product liability claims, including claims related to current and former products and asbestos-related claims concerning the premises and historic products of us and our predecessors. We could become subject to additional claims. An adverse outcome of these claims could have a materially adverse effect on our business, financial conditions, results of operations and cash flows.

 

We have also been involved in a number of governmental investigations, prosecutions and administrative claims in the past, including antitrust-related governmental investigations and civil lawsuits, and may in the future be subject to similar claims. Additionally, we have incurred and could again incur expenses in connection with antitrust-related matters, including expenses related to our cooperation with governmental authorities and defense-related civil lawsuits.

 

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Environmental, health and safety regulation matters could have a negative impact on our results of operations and cash flows.

 

We are subject to extensive federal, state, local and foreign environmental, health and safety laws and regulations concerning, among other things, emissions in the air, discharges to land, surface, subsurface strata and water and the generation, handling, storage, transportation, treatment and disposal of hazardous waste and other materials.  Our operations bear the risk of violations of those laws and sanctions for violations such as clean-up and removal costs, long-term monitoring and maintenance costs, costs of waste disposal, natural resource damages and payments for property damage and personal injury.  Although it is our policy to comply with such laws and regulations, it is possible that we have not been or may not be at all times in compliance with all of these requirements.

 

Additionally, these requirements, and enforcement of these requirements, may become more stringent in the future.  The ultimate additional cost of compliance with any such requirements could be material.  Non-compliance could subject us to material liabilities such as government fines or orders, criminal sanctions, third-party lawsuits, remediations and settlements, the suspension, modification or revocation of necessary permits and licenses, or the suspension of non-compliant operations.  We may also be required to make significant site or operational modifications at substantial cost.  Future regulatory or other developments could also restrict or eliminate the use of, or require us to make modifications to, our products, packaging, manufacturing processes and technology, which could have a significant adverse impact on our financial condition, results of operations and cash flows.

 

At any given time, we may be involved in claims, litigation, administrative proceedings, settlements and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage, personal injury and regulatory compliance or non-compliance.  The resolution of these environmental matters could have a material adverse effect on our results of operations and cash flows.

 

Recent federal regulations aimed at increasing security at certain chemical production plants and similar legislation that may be proposed in the future could require us to enhance plant security and to alter or discontinue our production of certain chemical products, thereby increasing our operating costs and causing an adverse effect on our results of operations.

 

Regulations have recently been issued by the U.S. Department of Homeland Security (“DHS”) aimed at decreasing the risk, and effects, of potential terrorist attacks on chemical plants located within the United States. Pursuant to these regulations, these goals would be accomplished in part through the requirement that certain high-priority facilities develop a prevention, preparedness, and response plan after conducting a vulnerability assessment. In addition, companies may be required to evaluate the possibility of using less dangerous chemicals and technologies as part of their vulnerability assessments and prevention plans and implementing feasible safer technologies in order to minimize potential damage to their facilities from a terrorist attack. Certain of our sites are subject to these regulations and we cannot state at this time with certainty the costs associated with any security plans that the DHS may require. These regulations may be revised further and additional legislation may be proposed in the future on this topic. It is possible that such future legislation could contain terms that are more restrictive than what has recently been passed and which would be more costly to us. We cannot predict the final form of currently pending legislation or other related legislation that may be passed and we can provide no assurance that such legislation will not have an adverse effect on our results of operations in a future reporting period. In addition, we may incur liabilities for subsequent damages in the event that we fail to comply with these regulations.

 

We operate on an international scale and are exposed to risks in the countries in which we have significant operations or interests. Changes in foreign laws and regulatory requirements, export controls or international tax treaties could adversely affect our results of operations and cash flows.

 

We are dependent, in large part, on the economies of the countries in which we manufacture and market our products. Of our 2011 net sales, 45% were to customers in the United States and Canada, 30% to Europe and Africa, 20% to the Asia/Pacific region and 5% to Latin America.  As of December 31, 2011, our net property, plant and equipment were located in various regions including 67% in the United States and Canada, 27% in Europe and Africa, 4% in the Asia/Pacific region and 2% in Latin America.

 

The economies of the countries within these areas are in different stages of socioeconomic development.  Consequently, we are exposed to risks from changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability and other political, economic or social developments that may materially adversely affect our financial condition, results of operations and cash flows.

 

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We may also face difficulties managing and administering an internationally dispersed business.  In particular, the management of our personnel across several countries can present logistical and managerial challenges.  Additionally, international operations present challenges related to operating under different business cultures and languages.  We may have to comply with unexpected changes in foreign laws and regulatory requirements, which could negatively impact our operations and ability to manage our global financial resources. Export controls or other regulatory restrictions could prevent us from shipping our products into and from some markets.  Moreover, we may not be able to adequately protect our trademarks and other intellectual property overseas due to uncertainty of laws and enforcement in a number of countries relating to the protection of intellectual property rights.  Changes in tax regulation and international tax treaties could significantly reduce the financial performance of our foreign operations or the magnitude of their contributions to our overall financial performance.

 

The recent European debt crisis could have a material adverse effect on our European operations.

 

The recent European debt crisis and related European financial restructuring efforts have contributed to instability in the global credit markets and may cause the value of the Euro to further deteriorate. If global economic and market conditions, or economic conditions in Europe, the United States or other key markets remain uncertain or deteriorate further, the value of the Euro and the credit market may weaken. While we do not transact a significant amount of business in Greece or Italy, the general financial instability in those countries could have a contagion effect on the region and contribute to the general instability and uncertainty in the European Union. If this were to occur, it could adversely affect our European customers and suppliers and in turn have a material adverse effect on our European business and results of operations.

 

If we fail to establish and maintain adequate internal controls over financial reporting, we may not be able to report our financial results in a timely and reliable manner, which could harm our business and impact the value of our securities.

 

We depend on our ability to produce accurate and timely financial statements in order to run our business. If we fail to do so, our business could be negatively affected and our independent registered public accounting firm may be unable to attest to the fair presentation of our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. If we cannot provide reliable financial reports and effectively prevent fraud, our reputation and operating results could be harmed. Even effective internal controls have inherent limitations including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting in future periods are subject to the risk that the control may become inadequate because of changes in conditions or a deterioration in that the degree of compliance with the policies or procedures.

 

We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement, including with respect to income tax accounts and international customer incentive, commission and promotional payment practices. We have completed the previously disclosed review of various customer incentive, commission and promotional payment practices of the Chemtura AgroSolutions segment in its Europe, Middle East and Africa region (the “EMEA Region”).  The review was conducted under the oversight of the Audit Committee of the Board of Directors and with the assistance of outside counsel and forensic accounting consultants.  As disclosed previously, the review found evidence of various suspicious payments made to persons in certain Central Asian countries and of activity intended to conceal the nature of those payments. The amounts of these payments were reflected in our books and records but were not recorded appropriately or in a transparent manner, including payments that were redirected to persons other than the customer, distributor or agent in the particular transaction. None of these payments were subject to adequate internal control. We have strengthened our worldwide internal controls relating to customer incentives and sales agent commissions and enhanced our global policy prohibiting improper payments which requires, among other things, that we monitor our international operations. Such monitoring may require that we investigate allegations of possible improprieties relating to transactions and the way in which such transactions are recorded. We have severed our relationship with all of the sales agents and the employees responsible for the suspicious payments. We are currently in discussions with the Securities and Exchange Commission regarding a possible resolution of this matter. We cannot reasonably estimate the nature or amount of monetary or other sanctions, if any, that might be imposed as a result of the review.

 

19
 

 

If we fail to maintain adequate internal controls, including any failure to implement new or improved controls, or if we experience difficulties in their implementation, we could fail to meet our reporting obligations, and there could be a material adverse effect on our business and financial results. In the event that our current control practices deteriorate, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our securities may be adversely affected.

 

Our results of operations are subject to exchange rate and other currency risks.  A significant movement in exchange rates could adversely impact our results of operations.

 

Significant portions of our businesses are conducted in currencies other than the U.S. dollar. Accordingly, foreign currency exchange rates affect our operating results. Effects of exchange rate fluctuations upon our future operating results cannot be predicted because of the number of currencies involved, the variability of currency exposure and the potential volatility of currency exchange rates. We face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. In certain foreign countries, some components of our cost structure are denominated in U.S. dollars while our revenues are denominated in the local currency. In those cases, currency devaluation could adversely impact our operating margins.

 

We are dependent upon a trained, dedicated sales force, the loss of which could materially affect our operations.

 

Many of our products are sold and supported through dedicated staff and specifically trained personnel.  The loss of this sales force due to market or other conditions could affect our ability to sell and support our products effectively, which could have an adverse effect on our results of operations.

 

Production facilities are subject to operating risks that may adversely affect our financial condition, results of operations and cash flows.

 

We are dependent on the continued operation of our production facilities.  Such production facilities are subject to hazards associated with the manufacturing, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, terrorist attacks, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, remediation complications, chemical spills, discharges or releases of toxic or hazardous gases, storage tank leaks and other environmental risks.  These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental damage, fines, civil or criminal penalties and liabilities. The occurrence of these events may disrupt production or incur significant costs, which could have an adverse effect on the production and profitability of a particular manufacturing facility and on our financial condition, results of operations and cash flows.

 

Our businesses depend upon many proprietary technologies, including patents, licenses and trademarks.  Our competitive position could be adversely affected if we fail to protect our patents or other intellectual property rights or if we become subject to claims that we are infringing upon the rights of others.

 

Our intellectual property is of particular importance for a number of the specialty chemicals that we manufacture and sell. The trademarks and patents that we own may be challenged, and because of such challenges, we could eventually lose our exclusive rights to use and enforce such proprietary technologies and trademarks, which would adversely affect our competitive position and results of operations. We are licensed to use certain patents and technology owned by other companies, including foreign companies, to manufacture products complementary to our own products. We pay royalties for these licenses in amounts not considered material, in the aggregate, to our consolidated results.

 

We also rely on unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. Although it is our policy to enter into confidentiality agreements with our employees and third parties to restrict the use and disclosure of trade secrets and proprietary know-how, those confidentiality agreements may be breached. Additionally, adequate remedies may not be available in the event of an unauthorized use or disclosure of such trade secrets and know-how, and others could obtain knowledge of such trade secrets through independent development or other access by legal means. The failure of our patents, trademarks or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets or proprietary know-how and the brands under which we market and sell our products could have a material adverse effect on our business, financial condition, results of operations and cash flows. 

  

20
 

 

We cannot be assured that our products or methods do not infringe on the patents, trademarks or other intellectual property rights of others. Infringement and other intellectual claims or proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of our business. In addition, intellectual property litigation or claims could force us to do one or more of the following:

 

·cease selling products that contain asserted intellectual property;
·pay substantial damages for past use of the asserted intellectual property;
·obtain a license from the holder of the asserted intellectual property, which may not be available on reasonable terms; and

·redesign or rename, in the case of trademark claims, our products to avoid infringing the rights of third parties.

 

Such requirements could adversely affect our revenue, increase costs, and harm our financial condition.

 

Our patents may not provide full protection against competing manufacturers outside of the United States, the European Union countries and certain other developed countries.  Weaker protection may adversely impact our sales and results of operations.

 

In some of the countries in which we operate, such as China, the laws protecting patent holders are significantly weaker than in the United States, countries in the European Union and certain other developed countries.  Weaker protection may assist competing manufacturers in becoming more competitive in markets in which they might not have otherwise been able to introduce competing products for a number of years. As a result, we tend to rely more heavily upon trade secret and know-how protection in these regions, as applicable, rather than patents. Additionally, for our Chemtura AgroSolutions segment products sold in China, we rely on regulatory protection of intellectual property provided by regulatory agencies, which may not provide us with complete protection against competitors.

 

An inability to remain technologically innovative and to offer improved products and services in a cost-effective manner could adversely impact our operating results.

 

Our operating results are influenced in part by our ability to introduce new products and services that offer distinct value to our customers.  For example, both our Chemtura AgroSolutions segment and our organometallic business seek to provide tailored products for our customers’ often unique problems, which require an ongoing level of innovation. In many of the markets where we sell our products, the products are subject to a traditional product life cycle. Even where we devote significant human and financial resources to develop new technologically advanced products and services, we may not be successful in these efforts.

 

Joint venture investments that we enter into could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and disputes between us and our joint venture partners.

 

A portion of our operations is conducted through certain ventures in which we share control with third parties. In these situations, we are not in a position to exercise sole decision-making authority regarding the facility, partnership, joint venture or other entity. Investments through partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the partnership or joint venture. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent the members of our management team from focusing their time and effort on our business. Consequently, action by, or disputes with, our joint venture partners might result in subjecting the facilities owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our joint venture partners. Our joint ventures’ unfunded and underfunded pension plans and post-retirement health care plans could adversely impact our financial condition, results of operations and cash flows.

 

21
 

 

Our unfunded and underfunded defined benefit pension plans and post-retirement welfare benefit plans could adversely impact our financial condition, results of operations and cash flows.

 

The cost of our defined benefit pension and post-retirement welfare benefit plans is recognized through operations over extended periods of time and involves many uncertainties during those periods of time. Our funding policy for defined benefit pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets or in a change of the expected rate of return on plan assets. Similarly, our post-retirement welfare benefit cost is materially affected by the discount rate used to measure these obligations, as well as by changes in the actual cost of providing these medical and other welfare benefits.

 

We have underfunded obligations under our U.S. tax-qualified defined benefit pension plans totaling approximately $234 million on a projected benefit obligation basis as of December 31, 2011. Further declines in the value of the plan investments, the discount rate used to measure liabilities or unfavorable changes in law or regulations that govern pension plan funding could materially change the timing and amount of required funding. Additionally, we sponsor other foreign and non-qualified U.S. pension plans under which there are substantial unfunded liabilities totaling approximately $114 million on a projected benefit obligation basis as of December 31, 2011. Foreign regulatory authorities may seek to have Chemtura and/or certain of our non-sponsoring subsidiaries take responsibility for some portion of these obligations. Mandatory funding contributions with respect to these obligations and potential unfunded benefit liability claims could have a material adverse effect on our financial condition, results of operations or future cash flows. In addition, our actual costs with respect to our post-retirement welfare benefit plans could exceed our current actuarial projections.

 

We are subject to risks associated with possible climate change legislation, regulation and international accords.

 

Greenhouse gas emissions have increasingly become the subject of a large amount of international, national, regional, state and local attention. Cap and trade initiatives to limit greenhouse gas emissions have been introduced in the European Union. Similarly, numerous bills related to climate change have been introduced in the U.S. Congress, which could adversely impact all industries. In addition, the EPA has promulgated rules limiting greenhouse gas emissions and regulation of greenhouse gas also could occur pursuant to future U.S. treaty obligations, statutory or regulatory changes under the Clean Air Act or new climate change legislation.

 

While not all are likely to become law, this is a strong indication that additional climate change related mandates will be forthcoming, and it is expected that they may adversely impact our costs by increasing energy costs and raw material prices and establishing costly emissions trading schemes and requiring modification of equipment to limit greenhouse gas emissions.

 

A step toward potential federal restriction on greenhouse gas emissions was taken on December 7, 2009 when the Environmental Protection Agency (“EPA”) issued its Endangerment Finding in response to a decision of the Supreme Court of the United States. The EPA found that the emission of six greenhouse gases, including carbon dioxide (which is emitted from the combustion of fossil fuels), may reasonably be anticipated to endanger public health and welfare. Based on this finding, the EPA defined the mix of these six greenhouse gases to be “air pollution” subject to regulation under the Clean Air Act. Although the EPA has stated a preference that greenhouse gas regulation be based on new federal legislation rather than the existing Clean Air Act, absent legislative action, the EPA has begun to regulate many sources of greenhouse gas emissions.

 

The U.S. Congress recently considered legislation that would create an economy-wide “cap-and-trade” system that would establish a limit (or cap) on overall greenhouse gas emissions and create a market for the purchase and/or sale of emissions permits or “allowances.” Under these proposals, the chemical industry likely would be affected due to anticipated increases in energy costs as fuel providers pass on the cost of the emissions allowances, which they would be required to obtain, to cover the emissions from fuel production and the eventual use of fuel by us or our energy suppliers. In addition, cap-and-trade proposals would likely increase the cost of energy, including purchases of steam and electricity, and certain raw materials used by us. Other countries are also considering or have implemented regulatory programs to reduce greenhouse gas emissions. Future environmental legislative and regulatory developments related to climate change are possible, which could materially increase operating costs in the chemical industry and thereby increase our manufacturing and delivery costs. In addition, it is presently unclear what effects, if any, changes in regional or global climate will have on our operations or results.

 

22
 

 

If our goodwill, intangible assets or long-lived assets become impaired, we may be required to record a significant charge to earnings.

 

Under U.S. GAAP, we review our intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment on July 31 of each year, or more frequently if required. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill, intangible assets or long-lived assets may not be recoverable, include, but are not limited to, a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill, intangible assets or long-lived assets is determined, negatively impacting our results of operations.

 

Restrictive covenants in our credit facilities and senior notes may limit our ability to engage in certain transactions.

 

Our credit facilities and senior notes contain various covenants that limit our ability to engage in specified types of transactions. The covenants limit our ability to, among other things, incur additional indebtedness or repay certain indebtedness, create liens, pay dividends on or make other distributions on or repurchase capital stock or make other restricted payments, make investments, and enter into acquisitions, dispositions and joint ventures. Such restrictions in our credit facilities and senior notes could result in us having to obtain the consent of our lenders in order to take certain actions. Recent disruptions in credit markets may prevent us from or make it more difficult or more costly for us to obtain such consents from our lenders. Our ability to expand our business or to address declines in our business may be limited if we are unable to obtain such consents.

 

A breach of any of these covenants could result in a default under our credit facilities and senior notes. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under our credit facilities and senior notes immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure our indebtedness. Our subsidiaries have pledged a significant portion of their assets as collateral under our credit facilities. If the lenders under credit facilities accelerate the repayment of borrowings, we may not have sufficient assets to repay amounts borrowed under the credit facilities which could have a material adverse effect on our cash flow and on the value of our stock.

 

If we issue additional shares of common stock in the future, it will result in the dilution of our existing stockholders.

 

Our certificate of incorporation authorizes the issuance of 500 million shares of common stock, of which 98.3 million shares were issued and 96.3 million shares outstanding as of December 31, 2011. Our board of directors has the authority to issue additional shares of common stock up to the authorized capital stated in the certificate of incorporation. Our board of directors may choose to issue some or all of such shares of common stock to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares of common stock will result in a reduction of the book value or market price of the outstanding shares of our common stock. Additionally, we have an incentive plan that allows for the issuance of up to 11 million shares (currently 6.3 million shares remain available for future grants), equal to eleven percent of Chemtura’s new shares of common stock issued on the Effective Date. We also have approximately 2 million shares available for issuance after the Effective Date to holders of Allowed Claims and Interests (as defined in the Plan). If we do issue any additional shares of common stock, including pursuant to our incentive plan, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders.

 

On October 18, 2011, we announced that our Board of Directors (the “Board”) has authorized us to repurchase up to $50 million of our common stock over the next twelve months. The shares are expected to be repurchased from time to time through open market purchases. The program, which does not obligate us to repurchase any particular amount of common stock, may be modified or suspended at any time at the Board’s discretion. The manner, price, number and timing of such repurchases, if any, will be subject to a variety of factors, including market conditions and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). As of December 31, 2011, we had purchased 2.0 million shares for $22 million.

 

23
 

 

Item 1B: Unresolved Staff Comments

 

None.

 

Item 2: Properties

 

The following table sets forth information regarding our principal operating properties and other significant properties as of December 31, 2011. All of the following properties are owned except where otherwise indicated. In general, our operating properties are well maintained, suitably equipped and in good operating condition.

 

Location   Facility   Reporting Segment
UNITED STATES        
Alabama        
Bay Minette   Plant   Industrial Performance Products
         
Arkansas        
El Dorado   Plant   Industrial Engineered Products
         
California        
McFarland   Repackaging Warehouse   Industrial Engineered Products
         
Connecticut        
Middlebury*   Executive Offices   Corporate Offices
Naugatuck   Research Center   Industrial Performance Products
         
Georgia        
Conyers   Plant   Consumer Products
Lawrenceville*   Office, Research Center   Consumer Products, Chemtura AgroSolutions
         
Illinois        
Mapleton   Plant   Industrial Engineered Products
Pekin*   Plant   Chemtura AgroSolutions
         
Indiana        
West Lafayette   Office, Research Center   Industrial Engineered Products
         
Louisiana        
Lake Charles   Plant   Consumer Products
Westlake   Land   Consumer Products
         
Michigan        
Adrian   Plant   Consumer Products
         
New Jersey        
East Hanover   Plant   Industrial Performance Products
Fords   Plant   Industrial Performance Products
Perth Amboy   Plant   Industrial Performance Products
         
North Carolina        
Gastonia   Plant   Industrial Performance Products, Chemtura AgroSolutions
         
Pennsylvania        
Philadelphia*   Executive Offices   Corporate Offices
         
West Virginia        
Morgantown   Plant, Research Center   Industrial Performance Products

 

24
 

 

Location   Facility   Reporting Segment
         
INTERNATIONAL        
Australia        
Sydney   Office   Corporate Office
         
Brazil        
Rio Claro   Plant   Industrial Engineered Products, Industrial Performance Products,
        Chemtura AgroSolutions
Sao Paulo*   Office   Industrial Engineered Products, Industrial Performance Products,
        Chemtura AgroSolutions
         
Canada        
Elmira   Plant   Industrial Performance Products, Chemtura AgroSolutions,
        Industrial Engineered Products
Guelph   Research Center   Chemtura AgroSolutions
West Hill   Plant   Consumer Products, Industrial Performance Products
         
France        
Catenoy   Plant   Industrial Performance Products
Dardilly*   Office   Consumer Products
         
Germany        
Bergkamen*   Plant, Research Center   Industrial Engineered Products
Waldkraiburg   Plant   Industrial Performance Products
Planegg*   Office   Consumer Products
         
Italy        
Latina   Plant   Industrial Performance Products, Chemtura AgroSolutions
Milan1   Office   Industrial Performance Products
Pedrengo   Plant   Industrial Performance Products
         
Mexico        
Altamira   Plant   Industrial Engineered Products, Industrial Performance Products
Cuautitlan   Plant   Industrial Engineered Products, Industrial Performance Products
Reynosa   Plant   Industrial Engineered Products
         
The Netherlands        
Amsterdam   Plant   Chemtura AgroSolutions
         
Republic of China        
Nanjing   Plant, Research Center   Industrial Performance Products
Shanghai*   Office   Corporate
         
South Africa        
Atlantis   Plant   Consumer Products
Boksburg   Office   Chemtura AgroSolutions
Kylami   Office   Industrial Performance Products
         
South Korea        
Pyongtaek2   Plant   Industrial Performance Products
         
Switzerland        
Frauenfeld*   Office   Industrial Engineered Products, Chemtura AgroSolutions, Corporate

 

25
 

 

Taiwan    
Kaohsiung Plant Industrial Engineered Products, Industrial Performance Products
     
United Kingdom    
Accrington Plant Industrial Performance Products
Cheltenham Office/Tech Center Consumer Products
Droitwich Plant Industrial Performance Products
Evesham Research Center Chemtura AgroSolutions
Langley* Office Chemtura AgroSolutions, Corporate
Trafford Park Plant, Office Industrial Engineered Products,  Industrial Performance Products, Corporate

 

 

* Leased property.

1 Facility leased by Anderol Italia S.r.l, which is 51% owned by us.

2 Facility owned by Asia Stabilizers Co. Ltd. which is 65% owned by us.

 

Item 3: Legal Proceedings

 

Information regarding our legal proceedings can be found in Note 19 – Legal Proceedings and Contingencies in our Notes to Consolidated Financial Statements and is incorporated by reference herein.

 

Item 4: (Removed and reserved)

 

26
 

 

PART II

 

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

On November 10, 2010, pursuant to our Plan, our previously outstanding common stock (including treasury stock) was cancelled and we authorized and began issuance of 100 million shares of our common stock, par value $0.01 per share (the “New Common Stock”). As of December 31, 2011, 98.3 million shares were issued and 96.3 million shares were outstanding and 1.9 million shares have been reserved for future issuances under the terms of the Plan. The New Common Stock was approved for listing on the New York Stock Exchange (the “NYSE”) on November 8, 2010 and started trading on the exchange under the ticker symbol “CHMT” on November 11, 2010.

 

From April 16, 2009 through November 10, 2010, the previously outstanding common stock was traded over the counter as quoted on the Pink Sheet Electronic Quotation Service (“Pink Sheets”) under the symbol “CEMJQ”.

 

We suspended the payment of dividends in relation to previous issued common stock on October 30, 2008. We have no current plans to pay any cash dividends on our New Common Stock and instead may retain earnings, if any, for future operation, expansion and debt repayment. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors (the “Board”) and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our five year senior secured revolving credit facility available through 2015 (the “ABL Facility”) and our senior secured term facility credit agreement due 2016 (the “Term Loan”) each contain a covenant restricting the payment of dividends by us and each of our subsidiaries that are party to such facilities, which is subject to a number of specific exceptions.

 

The following table summarizes the range of market prices for our previously outstanding common stock and New Common Stock as reported by the Pink Sheets or the NYSE, as applicable, by quarter during the past two years:

 

   2011 
   First   Second   Third   Fourth 
Market price per common share:                    
High  $17.98   $19.37   $18.92   $12.95 
Low  $15.05   $16.34   $9.86   $8.49 

 

   2010 
   First   Second   Third   Fourth 
Market price per common share:(a)                    
High  $1.71   $1.78   $0.68   $16.10 
Low  $1.00   $0.55   $0.29   $0.28 

 

(a)As a result of the cancelation of our previously outstanding common stock on November 10, 2010 and issuance of New Common Stock, as well as the recapitalization of our Company as a result of our reorganization process, the market prices per common share in this table prior to November 10, 2010 are not comparable with subsequent market prices per common share.

 

The number of holders of record of our New Common Stock on December 31, 2011 was approximately 4,900. See Item 1A – Risk Factors for a discussion of risks related to our common stock.

 

Issuer Purchases of Equity Securities During the Fourth Quarter of 2011

 

On October 18, 2011, we announced that our Board has authorized us to repurchase up to $50 million of our New Common Stock over the next twelve months. The shares are expected to be repurchased from time to time through open market purchases. The program, which does not obligate us to repurchase any particular amount of common stock, may be modified or suspended at any time at the Board’s discretion. The manner, price, number and timing of such repurchases, if any, will be subject to a variety of factors, including market conditions and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). As of December 31, 2011 the cumulative authorized repurchase allowance was $50 million, of which we had purchased 2 million shares for $22 million. The remaining allowance under the program was approximately $28 million.

 

27
 

 

The following table provides information about our repurchases of equity securities during the quarter ended December 31, 2011:

 

Period  Total Number
of Shares
Purchased
   Average
Price Paid
per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
   Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
   (in millions)       (in millions)   (in millions) 
October 1, 2011 - October 31, 2011   0.1   $11.17    0.1   $49 
November 1, 2011 - November 30, 2011   1.4   $10.75    1.4   $34 
December 1, 2011 - December 31, 2011   0.5   $10.86    0.5   $28 
Total   2.0         2.0      

  

PERFORMANCE GRAPH

 

The following graph compares the cumulative total return on our common stock for the period November 11, 2010 through December 31, 2011 with the returns of the Standard & Poor’s 500 Stock Index and the S&P 500 Specialty Chemicals Index, assuming an investment of $100 on November 11, 2010 and the reinvestment of all dividends. Since our old common stock was cancelled when we emerged from Chapter 11 and our New Common Stock began trading on the NYSE on November 11, 2010, stock performance prior to November 11, 2010 does not provide meaningful comparison and has not been provided.

 

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG CHEMTURA CORPORATION, 

S&P 500 AND S&P 500 SPECIALTY CHEMICALS

 

 

   11/11/10   12/31/10   03/31/11   06/30/11   09/30/11   12/31/11 
CHEMTURA CORPORATION  $100.0   $103.8   $111.7   $118.2   $65.1   $73.6 
S&P500  $100.0   $103.6   $109.3   $108.8   $93.2   $103.6 
S&P 500 SPECIALTY CHEMICALS  $100.0   $104.6   $105.8   $114.3   $98.9   $109.6 

 

28
 

 

Item 6: Selected Financial Data

 

The following reflects our selected financial data for each of our last five fiscal years. The information below should be read in conjunction with Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data of this Annual Report. The financial information presented may not be indicative of future performance.

 

(In millions of dollars, except per share data)  2011   2010   2009   2008   2007 
Summary of Operations                         
Net sales  $3,025   $2,760   $2,300   $3,154   $3,370 
Gross profit   729    657    579    717    819 
Selling, general and administrative   339    315    289    323    362 
Depreciation and amortization   140    175    162    221    254 
Research and development   43    42    35    46    57 
Facility closures, severance and related costs   3    1    3    23    34 
Antitrust costs   -    -    10    12    35 
(Gain) loss on sale of business (a)   (27)   (2)   -    25    15 
Impairment charges (b)   4    57    39    986    19 
Changes in estimates related to expected allowable claims (c)   3    35    73    -    - 
Equity income   (3)   (4)   -    (4)   (3)
Operating income (loss)   227    38    (32)   (915)   46 
Interest expense (d)   (63)   (191)   (70)   (78)   (87)
Loss on early extinguishment of debt   -    (88)   -    -    - 
Other (expense) income, net   -    (6)   (17)   9    (5)
Reorganization items, net (e)   (19)   (303)   (97)   -    - 
Earnings (loss) from continuing operations before income taxes   145    (550)   (216)   (984)   (46)
Income tax (expense) benefit   (25)   (22)   (10)   29    - 
Earnings (loss) from continuing operations   120    (572)   (226)   (955)   (46)
(Loss) earnings from discontinued operations, net of tax   -    (1)   (63)   (16)   27 
(Loss) gain on sale of discontinued operations, net of tax   -    (12)   (3)   -    24 
Net earnings (loss)   120    (585)   (292)   (971)   5 
Less: net earnings attributable to non-controlling interests   (1)   (1)   (1)   (2)   (8)
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)  $(973)  $(3)
                          
Amounts attribuable to Chemtura common stockholders:                         
Earnings (loss) from continuing operations, net of tax  $119   $(573)  $(227)  $(957)  $(54)
(Loss) earnings from discontinued operations, net of tax   -    (1)   (63)   (16)   27 
(Loss) gain on sale of discontinued operations, net of tax   -    (12)   (3)   -    24 
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)  $(973)  $(3)

 

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(In millions, except per share data)  2011   2010   2009   2008   2007 
Per Share Statistics                         
                          
Earnings (loss) from continuing operations, net of tax  $1.19   $(2.58)  $(0.93)  $(3.94)  $(0.22)
(Loss) earnings from discontinued operations, net of tax   -    -    (0.26)   (0.07)   0.11 
(Loss) gain on sale of discontinued operations, net of tax   -    (0.05)   (0.01)   -    0.10 
Net earnings (loss) attributable to Chemtura  $1.19   $(2.63)  $(1.20)  $(4.01)  $(0.01)
Dividends  $-   $-   $-   $0.15   $0.20 
Book value  $10.86   $10.16   $0.71   $2.01   $7.84 
Common stock trading range:    High (f)  $19.37   $16.10   $1.55   $8.81   $12.33 
                                                    Low (f)  $8.49   $0.28   $0.02   $1.02   $6.95 
Average shares outstanding - Basic (f)   100.1    223.0    242.9    242.3    241.6 
Average shares outstanding - Diluted (f)   100.3    223.0    242.9    242.3    241.6 
                          
Financial Position                         
Working capital (deficiency) (g)  $931   $932   $881   $(558)  $700 
Current ratio (g)   3.4    2.9    2.5    0.7    2.0 
Total assets  $2,855   $2,913   $3,118   $3,057   $4,416 
Total debt, including short-term borrowings (g)  $753   $751   $255   $1,204   $1,063 
Stockholders' equity  $1,046   $971   $172   $488   $1,899 
Total capital employed (g)  $1,799   $1,722   $427   $1,692   $2,962 
Debt to total capital % (g)   41.9    43.6    59.7    71.2    35.9 
                          
(In millions of dollars, except for number of employees)                         
Other Statistics                         
Net cash provided by (used in) operations (h)  $182   $(204)  $49   $(11)  $149 
Capital spending from continuing operations  $154   $124   $53   $116   $107 
Depreciation from continuing operations  $102   $138   $124   $177   $216 
Amortization from continuing operations  $38   $37   $38   $44   $38 
Approximate number of employees at end of year   4,500    4,200    4,400    4,700    5,100 

 

(a)(Gain) loss on sale of business primarily included a $27 million gain on the sale of our 50% interest in Tetrabrom Technologies Ltd. in 2011, a $2 million gain relating to the sale of the natural sodium sulfonates and oxidized petrolatum product lines in 2010, a $25 million loss relating primarily to the sale of the oleochemicals business in 2008 and a $15 million loss on the sale of assets relating to the sale of the Celogen® product line in 2007.
(b)The 2011 charge primarily included the impairment of intangible assets of $3 million within the Chemtura AgroSolutions. The 2010 charge included the impairment of goodwill of $57 million within the Chemtura AgroSolutions segment. The 2009 charge included the impairment of goodwill of $37 million and the impairment of intangible assets of $2 million within the Consumer Products segment. The 2008 charge primarily included a $985 million impairment of goodwill associated with the Consumer Products, Industrial Performance Products and Industrial Engineered Products segments. The 2007 charge primarily included a $9 million reduction in the value of assets relating to the closure and sale of the Ravenna, Italy facility and a $4 million write-off of construction in progress associated with certain facilities affected by the 2007 restructuring programs.
(c)Changes in estimates related to expected allowable claims relate to adjustments to liabilities subject to compromise (primarily legal and environmental reserves) as a result of our Chapter 11 proofs of claim evaluation process.
(d)Interest expense in 2010 includes $137 million of contractual interest expense recorded, relating to interest obligations on unsecured claims for the period from March 18, 2009 through the Effective Date that were paid based on the Plan (included in this amount is contractual interest expense of $63 million for 2009).
(e)Reorganization items, net, represent professional fees; the write-off of debt discounts, premiums and debt issuance costs; the write-off of deferred financing expenses related to the termination of the U.S. accounts receivable facility; impacts from rejections or terminations of executory contracts and real property leases; impacts from the settlement of claims; and charges for reorganization initiatives.
(f)Upon the effectiveness of our Plan, all previously outstanding shares of common stock were cancelled and pursuant to the Plan approximately 96 million shares of New Common Stock were issued. The weighted average shares for 2010 was based upon 243 million of old shares outstanding for approximately 10 months and approximately 100 million of new shares outstanding for approximately 2 months. As a result, the average shares outstanding and price of our New Common Stock may not be comparable to prior periods.
(g)The 2009 amounts excludes $2 billion of Liabilities Subject to Compromise.
(h)The 2010 net cash used in operations included $195 million related to cash settlements of claims in connection with the Chapter 11 cases and $50 million of pension contributions in accordance with the Plan.

 

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this Form 10-K.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Forward-Looking Statements” for a discussion of certain of the uncertainties, risks and assumptions associated with these statements.

 

OUR BUSINESS

 

We are among the larger publicly traded specialty chemical companies in the United States. We are dedicated to delivering innovative, application-focused specialty chemical solutions and consumer products. Our principal executive offices are located in Philadelphia, Pennsylvania and Middlebury, Connecticut. We operate in a wide variety of end-use industries, including agriculture, automotive, building and construction, electronics, lubricants, packaging, plastics for durable and non-durable goods, pool and spa chemicals and transportation. The majority of our chemical products are sold to industrial manufacturing customers for use as additives, ingredients or intermediates that add value to their end products. Our agrochemical and consumer products are sold to dealers, distributors and major retailers. We are a leader in many of our key product lines and transact business in more than 100 countries.

 

The primary economic factors that influence the operations and sales of our Industrial Performance Products (“Industrial Performance”) and Industrial Engineered Products (“Industrial Engineered”) segments (collectively referred to as, “Industrials”) are industrial, electronic component and polymer production, residential and commercial construction. In addition, our Chemtura AgroSolutions segment is influenced by worldwide weather, disease and pest infestation conditions. Our Consumer Products segment is also influenced by general economic conditions impacting consumer spending and weather conditions. For additional factors that impact our performance, see Item 1A - Risk Factors.

 

Other factors affecting our financial performance include industry capacity, customer demand, raw material and energy costs, and selling prices. Selling prices are influenced by the global demand and supply for the products we produce. We pursue selling prices that reflect the value our products deliver to our customers, while seeking to pass on higher costs for raw material and energy to preserve our profit margins.

 

Overview of Our Performance

 

We ended 2010 having emerged from Chapter 11 stronger and more focused on our customers and the industries we serve. We had strengthened our emphasis on performance and execution, eliminated non-value added costs, reduced legacy environmental and litigation exposures and reduced our financial leverage. We emerged from Chapter 11 with a much stronger balance sheet and substantial liquidity.

 

In 2011, we focused on executing our strategies for growth and in the process quickly returned to profitability. In our first year following our reorganization we earned $1.19 per diluted share.

 

At the core of our strategy is a focus on innovation and growth, particularly in the faster growing regions of the world. In 2011 we introduced new products, offered new and built on existing applications’ and invested in our businesses to serve our customers’ growing demand. Among the many accomplishments of 2011 are:

 

Industrial Performance

 

·We announced our plans to build a new multi-purpose manufacturing facility in Nantong, China to support the growth in customer demand in the Asian region initially producing petroleum additives and urethanes products.

 

·We committed to establish a European manufacturing capability for our Synton® line of high-viscosity polyalphaolefin (“HVPAO”) synthetic basestocks. This increased capacity will support our ability to meet the increasing global demand for these products by locating production capacity in a region of significant demand growth, and will enhance our service levels to continue to meet our customer commitments. Engineering work has commenced to enable production in 2013 of the Synton® 40 and Synton® 100 HVPAO products at our facility in Ankerweg, Amsterdam, The Netherlands.

 

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Industrial Engineered

 

·We continued the launch of our EmeraldTM range of flame retardants. We introduced EmeraldTM 3000, based on technology we licensed from The Dow Chemical Company, for use in XPS and EPS foams. We continued the introduction of EmeraldTM 1000 and introduced EmeraldTM 2000 which are used in the electronics market.

 

·We are adding capacity for diethylzinc, triethylaluminum, and trimethylaluminum for organometallics. Demand for diethylzinc in pharmaceutical and solar applications outweighs supply. Trimethylaluminum is a building block for materials used in high brightness LEDs.

 

·We formed the DayStar joint venture in Korea with UP Chemical Co. Ltd. so we can better serve the fabricators of high brightness LEDs.

 

·We entered into a letter of intent with Archean Group to establish a strategic alliance in bromine and brominated derivatives in India.

 

Consumer Products

 

·We developed and registered a new range of opening price point products and introduced the Pool EssentialsTM brand.

 

Chemtura AgroSolutions

 

·We formed the ISEM S.r.l. joint venture in Italy with Isagro S.p.a to accelerate the development of our new product pipeline.

 

·We appointed Bayer Crop Science as the distributor of our seed enhancement products in the Republic of China.

 

·We obtained new product registrations and sourced new products for the expected introduction of at least 80 new products in 2012.

 

The need to make significant investments to support the growth in demand for many of our customer applications combined with the relentless increases in raw material input costs required us to place focus on increasing selling prices within our Industrial segments in 2011.

 

Like many industrial businesses, growth slowed in the second half of 2011 as customers tried to digest the changing perspectives on economic growth and the possible impacts of the European sovereign debt issues. Nevertheless, despite this uncertainty, we delivered significant year-on-year improvement in each of the four quarters of 2011.

 

As we look to 2012, we will continue to invest in people, capital expenditures and technology as we did in 2011 to further drive growth and improved profitability.

 

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RESULTS OF OPERATIONS            
(In millions, except per share data)            
   2011   2010   2009 
Net Sales            
Industrial Performance Products  $1,358   $1,223   $999 
Industrial Engineered Products   869    728    512 
Consumer Products   422    458    457 
Chemtura AgroSolutions   376    351    332 
Net Sales  $3,025   $2,760   $2,300 
                
Operating Income (Loss)               
Industrial Performance Products  $137   $119   $91 
Industrial Engineered Products   130    25    3 
Consumer Products   26    67    63 
Chemtura AgroSolutions   30    21    42 
Segment Operating Income   323    232    199 
             
General corporate expense including amortization   (113)   (102)   (106)
Change in useful life of property, plant and equipment   -    (1)   - 
Facility closures, severance and related costs   (3)   (1)   (3)
Antitrust costs   -    -    (10)
Gain on sale of businesses   27    2    - 
Impairment charges   (4)   (57)   (39)
Changes in estimates related to expected allowable claims   (3)   (35)   (73)
Total Operating Income (Loss)   227    38    (32)
                
Interest expense   (63)   (191)   (70)
Loss on early extinguishment of debt   -    (88)   - 
Other expense, net   -    (6)   (17)
Reorganization items, net   (19)   (303)   (97)
                
Earnings (loss) from continuing operations before income taxes   145    (550)   (216)
Income tax expense   (25)   (22)   (10)
                
Earnings (loss) from continuing operations   120    (572)   (226)
Loss from discontinued operations, net of tax   -    (1)   (63)
Loss on sale of discontinued operations, net of tax   -    (12)   (3)
Net earnings (loss)   120    (585)   (292)
Less: net earnings attributable to non-controlling interests   (1)   (1)   (1)
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)
                
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED - ATTRIBUTABLE TO CHEMTURA:       
Earnings (loss) from continuing operations  $1.19   $(2.58)  $(0.93)
Loss from discontinued operations   -    -    (0.26)
Loss on sale of discontinued operations   -    (0.05)   (0.01)
Net earnings (loss) attributable to Chemtura  $1.19   $(2.63)  $(1.20)
                
Basic weighted-average shares outstanding   100.1    223.0    242.9 
                
Diluted weighted-average shares outstanding   100.3    223.0    242.9 

 

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2011 COMPARED TO 2010

 

Overview

 

We reported consolidated net sales of $3 billion for the year ended 2011, which represents a $265 million increase over our consolidated net sales for 2010. We realized $213 million from higher selling prices, reflecting the requirements to reinvest in and support growing customer demand in our Industrial segments and to recover increases in raw material costs. Despite increased economic uncertainty and weaker electronics demand in the second half of the year, net sales volumes increased by $30 million year-on-year. Sales volume growth was generated by our Industrial Performance and Chemtura AgroSolutions segments, with sales volume decreases in our Industrial Engineered and Consumer Products segments. The volume decline in our Consumer Products segment reflected the loss of a pool and spa mass market customer for the 2011 season. Additionally, we benefited from $35 million in favorable foreign currency translation, primarily due to the strength of the Euro in the first half of the year. These increases were offset by a $13 million reduction in sales as a result of the natural sodium sulfonates and oxidized petrolatum product lines in the third quarter of 2010.

 

Our gross profit as a percentage of net sales for 2011 remained constant at 24% despite significant increases in our raw material and distribution costs. Gross profit for 2011 increased by $72 million over 2010 to $729 million. Increased selling prices generated a $213 million benefit, partially offset by a $110 million increase in raw material and energy costs coupled with $40 million and $11 million in higher manufacturing and distribution costs, respectively. Raw material costs in all of our segments experienced significant increases. Higher manufacturing costs in our Industrials segments were due to lower production volumes in the second-half of the year, higher maintenance cost, certain weather related plant outages in the third quarter and the relocation of certain manufacturing assets. We had a $15 million benefit from increased sales volumes and changes to our sales mix largely in our Industrial Performance segment which were only partially offset by declines in our Consumer Products segment. Gross profit increased by $10 million as a result of the favorable effects of selling our products in currencies other than the U.S. dollar, but was offset in part by a $3 million reduction due to a divestiture in the third quarter of 2010 and a $2 million increase in other costs.

 

Selling, general and administrative (“SG&A”) expense of $339 million was $24 million higher than in 2010. The increase was due to higher stock-based compensation expense of $22 million, which principally reflected equity awards made under the various emergence incentive plans and an $8 million charge related to an ongoing evaluation of a UK Pension benefit matter. In addition, our selling costs increased by $7 million over the prior year as we invested to promote our growth. These increases were only partially offset by a $5 million decrease in legal expenses and a $8 million decrease in all other expenses.

 

Depreciation and amortization expense of $140 million was $35 million lower than the prior year, primarily due to accelerated depreciation incurred in 2010 related to our El Dorado, Arkansas facility restructuring activities.

 

Research and development (“R&D”) expense of $43 million was $1 million higher than the prior year as a result of increased investment.

 

Facility closures, severance and related costs were $3 million in 2011 as compared with $1 million in 2010. The 2011 charges primarily related to severance costs of a restructuring plan to increase the effectiveness of our Chemtura AgroSolutions segment. The 2010 costs were related to the ongoing execution of prior restructuring initiatives.

 

Gain on sale of business of $27 million for 2011 related to the sale of our 50% interest in Tetrabrom Technologies Ltd. Gain on sale of business of $2 million for 2010 related to the divestiture of the natural sodium sulfonates and oxidized petrolatum product lines in the third quarter of that year.

 

We recorded impairment charges of $4 million in 2011 and $57 million in 2010. The 2011 charge included the impairment of intangible assets of our Chemtura AgroSolutions segment and property, plant and equipment related to our El Dorado, Arkansas facility. The 2010 charge included the impairment of goodwill within the Chemtura AgroSolutions segment, resulting from weaker industry demand due to the global economic recession. These factors resulted in reduced expectations for future cash flows resulting in lower estimated fair values for the respective assets.

 

Changes in estimates related to expected allowable claims were $3 million for 2011 compared with $35 million for 2010. These charges included adjustments to liabilities subject to compromise, primarily legal and environmental reserves, which were identified in the Chapter 11 claim evaluation and settlement processes. Recoveries from insurance carriers were included in these changes in estimates once contingencies related to coverage disputes with the insurance carriers were resolved and coverage was deemed probable. We recorded $32 million in 2010 related to insurance recoveries. The decrease in activity in 2011 is due to the confirmation of the Plan in November 2010 leaving just a number of disputed claims to be resolved.

 

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In 2010, we determined that it was probable that obligations for interest on unsecured claims in the Chapter 11 proceedings would ultimately be paid based on the estimated claim recoveries reflected in the Plan. As such, prior interest from the Petition Date was recorded in 2010. Additionally, in August 2010, we entered into senior notes and a term loan to finance our emergence from Chapter 11. As a result, interest expense of $63 million in 2011 was significantly lower than that incurred in 2010.

 

Other expense, net in 2011 was less than $1 million compared with other expense, net of $6 million for the same period of 2010. Other expense primarily reflects foreign exchange gains or losses.

 

Reorganization items, net of $19 million in 2011 was $284 million lower than in 2010. Expense in both years is principally comprised of professional fees directly associated with the Chapter 11 reorganization and the impact of the value of negotiated claims settlements. The decrease in 2011 reflects our emergence from Chapter 11 in November 2010.

 

The income tax expense from continuing operations in 2011 was $25 million, compared with $22 million in 2010. The tax expense reported in 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 $17 million tax benefit was recorded after receiving approval from the international jurisdiction to change our filing position. In 2011 and 2010, we provided a full valuation allowance against the tax expense associated with our U.S. net operating loss.

 

Net earnings from continuing operations attributable to Chemtura for 2011 was $119 million, or $1.19 per share as compared with a net loss from continuing operations attributable to Chemtura of $573 million, or $2.58 per share for 2010.

 

The loss from discontinued operations in 2010 was related to the divesture of the PVC additives business in April 2010.

 

The following is a discussion of our segment results:

 

Industrial Performance Products

 

The Industrial Performance segment benefited from higher sales volumes driven by increased customer demand for petroleum additive products used in automotive, refrigeration and general industrial applications and for urethane products used in mining, oil and gas and general industrial applications. The increased demand was predominately in the first half of the year and weakened in the second half of the year as general economic conditions softened. We saw significant increases in raw material costs throughout the year and higher manufacturing costs due to production issues experienced in the first half of 2011. Increases in sales volumes and the cost of fuel surcharges resulted in higher distribution costs over last year. The increase in these costs were effectively covered by selling price increases in all businesses throughout the year. We continued to focus our efforts in providing value added products and services and invested our capital in the addition of resources in our sales and technology areas to support our research and development efforts and offer improved customer support. In the third quarter of 2010, this segment divested its natural sodium sulfonates and oxidized petrolatum product lines.

 

The Industrial Performance segment reported net sales of $1.4 billion in 2011, a $135 million improvement over 2010. This growth was primarily driven by an $81 million benefit from higher selling prices and a $56 million benefit from increased sales volume. The segment also benefitted from favorable foreign currency translation of $11 million. These increases were partly offset by a $13 million reduction in net sales due to the divestiture of its natural sodium sulfonates and oxidized petrolatum product lines in the third quarter of 2010.

 

Operating income totaled $137 million for 2011, an increase of $18 million over 2010. Improvement in our results reflected the higher selling prices, increased volume and changes in sales mix of $27 million, lower costs associated with REACh (now that the first registration date has passed)of $2 million and a $1 million benefit from favorable foreign currency translation. These benefits were partially offset by increases of $67 million in raw material costs, $12 million in higher manufacturing costs, $3 million in higher distribution costs and $8 million in higher SG&A and R&D (collectively “SGA&R”) costs. Operating income was reduced by $3 million due to the divestiture of our natural sodium sulfonates and oxidized petrolatum product lines in the third quarter of 2010.

 

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Industrial Engineered Products

 

Our Industrial Engineered segment reported overall lower volumes in 2011 compared with 2010 due primarily to weaker demand in the second half of the year. The lower volumes were the result of reduced demand for flame retardants used in printed wiring boards in the electrical and electronics industries and lower demand for tin-based organometallics products. Sales volumes for our other organometallic products showed solid increases versus the prior year. The segment experienced significant increases in raw material costs throughout the year, higher manufacturing costs due to lower plant production volumes and higher plant maintenance costs, increased distribution costs due to rate increases and higher SGA&R expense in sales and technology to support our growth initiatives. This segment aggressively increased selling prices throughout 2011 to cover these cost increases as well as to support the required capacity reinvestments to ensure a sustainable and reliable supply of products to our customers. The segment also benefited from the non-recurring expense incurred in 2010 related to accelerated depreciation in our El Dorado, Arkansas facility.

 

Net sales for the Industrial Engineered segment were $869 million in 2011. The $141 million increase from the prior year was largely the result of $139 million in higher selling prices, $12 million in favorable foreign currency translation on products sold in currencies other than the U.S. Dollar, partially offset by $10 million in volume reductions.

 

Operating income of $130 million in 2011 reflected an improvement of $105 million compared with $25 million in 2010. Improvements reflected significant higher selling prices, a favorable volume and sales mix of $2 million, the favorable impact of foreign currency translation of $7 million and a $2 million decrease in other costs. These benefits more than offset a $37 million increase in raw material costs, $21 million in higher manufacturing costs, $5 million higher distribution costs and a $9 million increase in SGA&R costs. Additionally, 2011 comparisons were favorably impacted by the $27 million incurred in non-recurring accelerated depreciation charges in 2010 related to our El Dorado, Arkansas facility.

 

Consumer Products

 

Our Consumer Products segment was negatively impacted by the loss of a mass market customer for the 2011 season, selling price reductions within the domestic mass market channel, tighter customer management of their inventory requirements during the year and mixed weather conditions during the season. Lower production volumes resulted in higher manufacturing costs. Reductions in our selling prices were the result of competition when bidding for the 2011 selling season.

 

Net sales for the Consumer Products segment were $422 million in 2011, which was $36 million below 2010. This decline is largely due to a $34 million decrease in volume and a $9 million reduction in selling prices. These reductions were offset by $7 million in favorable foreign currency translation.

 

Consumer Products reported operating income of $26 million for 2011 which was $41 million below operating income of $67 million in 2010. The decline in operating income reflected the reductions in sales price and volume of $9 million and $18 million, respectively. In addition, the segment experienced $12 million in increased manufacturing costs and $6 million in increased raw material costs and a $1 million decrease in other costs. The segment benefited from $3 million of favorable foreign currency translation and a $2 million reduction in accelerated depreciation expense.

 

Chemtura AgroSolutions

 

Our Chemtura AgroSolutions segment benefited from increases in sales volume, particularly in our seed treatment and acaricides products and increased selling prices in North America. We also benefitted from the non-recurring legal expenses that were partially offset by higher bad debt expense and start-up losses from our ISEM joint venture in 2011.

 

Net sales rose by $25 million to $376 million in 2011 reflecting the benefit of the $18 million growth in volume, $5 million related to favorable foreign currency translation and $2 million in higher selling prices.

 

Operating income increased $9 million in 2011 to $30 million compared with $21 million in 2010. This increase is a reflection of the increase in sales volume of $5 million, reductions in manufacturing costs of $5 million and the increase in selling prices noted above. Operating income was also impacted by distribution costs increases of $4 million, equity losses from our ISEM joint venture of $2 million, the $1 million impact of unfavorable foreign currency translation and $1 million in higher accelerated depreciation cost, partially offset by the $2 million benefit from non-recurring legal expenses net of the higher bad debt expense and a $3 million decrease in other costs.

 

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General Corporate

 

Included in our general corporate expenses are costs of a general nature or managed on a corporate basis. These costs (net of allocations to the business segments) primarily represent corporate stewardship and administration activities together with costs associated with legacy activities and intangible asset amortization. Functional costs are allocated between the business segments and general corporate expense.

 

Corporate expense was $113 million in 2011, which included $38 million of amortization expense related to intangible assets. In comparison, corporate expense was $102 million in 2010 which included $37 million of amortization expense related to intangible assets.

 

The $11 million increase in corporate expense was largely due to a $12 million increase in stock-based compensation expense, principally the result of equity awards made under the emergence incentive plans. These costs were partially offset by a reduction in environmental reserve adjustments required for 2011 as compared with 2010 and reduced U.S. post-retirement benefit plan expense for 2011.

 

2010 COMPARED TO 2009

 

Overview

 

Consolidated net sales increased by $460 million to $2.8 billion in 2010 compared with $2.3 billion in 2009. The increase in net sales was attributable to increased sales volumes of $422 million and higher selling prices of $52 million, partially offset by unfavorable foreign currency translation of $6 million and $8 million in lost revenues related to the divestiture of the natural sodium sulfonates and oxidized petrolatum product lines. The increase in sales volume was principally within the Industrial segments as the industries we supply through these segments were the most severely affected by the economic recession in 2009 as demand declined sharply and customers undertook de-stocking in light of the changes in the economy. By the second quarter of 2009, inventory de-stocking had ceased and some industry sectors, such as electronics, started to show strong recovery which continued throughout 2010. However, in many of the industrial sectors exposed to macroeconomic cyclicality, such as building and construction, the recovery had been modest and demand still significantly lagged the levels seen before the onset of the recession.

 

Gross profit for 2010 was $657 million, an increase of $78 million compared with $579 million in 2009. The increase in gross profit was primarily due to $86 million in higher sales volume (net of product mix), $61 million of favorable manufacturing costs and $52 million from higher selling prices. These improvements were partially offset by $79 million in higher raw material and energy costs, an $18 million increase in distribution costs, $7 million related to costs associated with registration of chemicals in the European Union under REACh legislation, $4 million from unfavorable foreign currency exchange, a $3 million environmental reserve adjustment, $2 million in lost income from the sale of the natural sodium sulfonates and oxidized petrolatum product lines, a $1 million increase in stock-based compensation expense and a $7 million increase in other costs. Our results were impacted by increased raw material costs compared with the lower levels seen in the first three quarters of 2009. Gross profit as a percentage of sales was 24% in 2010, or 1% lower than 2009, mainly due to the increases in raw material costs exceeding increases in selling prices.

 

SG&A expense of $315 million was $26 million higher than the prior year, primarily due to higher selling and marketing expense, legal expenses, stock-based compensation expense, and a loss on disposal of an asset. Approximately $6 million of the increase in SG&A expense related to expenses associated with the internal review of customer incentive, commission and promotional payment practices in the European region. The increase in stock-based compensation expense of $5 million primarily related to expense recognized in 2010 for the 2009 and 2010 emergence incentive plan which were approved in 2010. The loss on disposal of an asset of $2 million in 2010 related to a software component of our SAP system that we no longer utilized.

 

Depreciation and amortization expense from continuing operations of $175 million was $13 million higher than the prior year. This includes accelerated depreciation related to restructuring activities of $30 million in 2010 primarily within our Industrial Engineered segment, compared with accelerated depreciation of $5 million in 2009 within our Consumer Products and Industrial Performance segments.

 

R&D expense of $42 million in 2010 was $7 million higher than in 2009 as a result of increased investment in new product and technology development.

 

Facility closures, severance and related costs were $1 million in 2010 as compared with $3 million in 2009. These charges related to our ongoing execution of restructuring initiatives.

 

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Antitrust costs were negligible in 2010 and $10 million in 2009. The antitrust costs in 2009 primarily represented a judgment in litigation related to certain rubber chemical claimants and legal costs associated with antitrust investigations and civil lawsuits.

 

The gain on sale of business of $2 million in 2010 related to the sale of our natural sodium sulfonates and oxidized petrolatum product lines within our Industrial Performance segment.

  

We recorded impairment charges of $57 million in 2010 and $39 million in 2009. The 2010 charge included the impairment of goodwill within the Chemtura AgroSolutions segment. The 2009 charge included the impairment of goodwill of $37 million and the impairment of intangible assets of $2 million within the Consumer Products segment. The impairment charges were principally the result of underperformance in these segments caused by weaker industry demand due to the global economic recession. These factors resulted in reduced expectations for future cash flows and lower estimated fair values for the respective assets.

 

Changes in estimates related to expected allowable claims were $35 million in 2010 compared with $73 million in 2009. These changes included adjustments to liabilities subject to compromise (primarily legal and environmental reserves) identified in the Chapter 11 proofs of claim evaluation and settlement process. Recoveries from insurance carriers are included in these changes in estimates once contingencies related to coverage disputes with insurance carriers had been resolved and coverage was deemed probable. We recorded $32 million in 2010 related to insurance coverage.

 

Interest expense of $191 million in 2010 was $121 million higher than in 2009. The higher interest expense resulted from our determination that it was probable that obligations for interest on unsecured bankruptcy claims would ultimately be paid based on the estimated claim recoveries reflected in the Plan filed during the second quarter of 2010. As such, interest that had not previously been recorded since the Petition Date was recorded in the second quarter of 2010. The amount of post-petition interest recorded in 2010 was $137 million (included in the amount is contractual interest of $63 million relating to 2009), which represented the cumulative amount of interest accruing from the Petition Date through the Effective Date. Additionally, we recorded interest expense incurred with respect to the Senior Notes and Term Loan. These impacts were partially offset by lower financing costs under the Amended DIP Credit Facility entered into in February 2010.

 

Loss on early extinguishment of debt of $88 million in 2010 included $70 million primarily related to the settlement of the make-whole and no-call claims on the pre-petition notes under the terms of the Plan and $18 million related to the write-off of financing costs related to debt modifications resulting from the Term Loan in the fourth quarter of 2010 and the DIP Credit Facility in the first quarter of 2010.

 

Other expense, net of $6 million in 2010 was $11 million lower than in the prior year. The decrease in expense primarily reflected lower net foreign currency exchange losses and lower fees associated with the termination of our accounts receivable financing facilities in 2009, partially offset by lower interest income. Foreign currency exchange losses related to impacts on unhedged exposures due to our inability to enter into foreign currency hedge contracts under the terms of our debt agreements while in Chapter 11.

 

Reorganization items, net in 2010 of $303 million primarily was comprised of professional fees directly associated with the Chapter 11 reorganization and the impact of claims settlements related to the consummation of our confirmed Plan. Reorganization items, net in 2009 was $97 million which included the write-off of pre-petition debt discounts, premiums and debt issuance costs, professional fees directly associated with the Chapter 11 reorganization and the write-off of deferred financing expenses related to the termination of the U.S. accounts receivable financing facility, partially offset by gains on a settlement of pre-petition liabilities.

 

Our income tax expense in 2010 was $22 million compared with $10 million in 2009. The 2010 income tax expense was primarily related to our non-U.S. operations since we provided a full valuation allowance against the tax benefit associated with our U.S. net operating loss. The 2009 income tax expense included an increase to our valuation allowance and the impact of a decrease in the liability for an unrecognized tax benefit of $9 million as a result of the expiration of the statute of limitation; bankruptcy claims adjustments and favorable audit settlements or payments related to prior years.

 

Loss from continuing operations attributable to Chemtura for 2010 was $573 million or $2.58 per diluted share, as compared with a loss in 2009 of $227 million, or $0.93 per diluted share.

 

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The loss from discontinued operations in 2010 was $1 million compared with a loss from discontinued operations in 2009 of $63 million (net of a $6 million tax benefit), which reflected the operations of the PVC additives business that was subsequently sold. The decrease in the loss from discontinued operations mainly related to a $65 million impairment charge in 2009.

 

The loss on sale of discontinued operations in 2010 was $12 million (net of a $1 million tax benefit), related to the PVC additives business which was sold in April 2010. The loss on sale of discontinued operations in 2009 was $3 million (net of a $1 million tax benefit), which represented an adjustment for a loss contingency related to the sale of the OrganoSilicones business in July 2003.

 

The following is a discussion of the results of our segments.

 

Industrial Performance Products

 

Industrial Performance segment net sales increased by $224 million or 22% to $1.2 billion in 2010. Operating income increased by $28 million or 31% to $119 million in 2010.

 

The increase in net sales was driven primarily by increased sales volume of $219 million and increased selling prices of $19 million, partially offset by $6 million in unfavorable foreign currency translation and an $8 million reduction from the sale of the natural sodium sulfonates and oxidized petrolatum product lines. The higher sales volume was driven by increased customer demand across all industry segments due to improved economic conditions and general recoveries in the industrial applications we served compared with 2009, as well as strong growth in the Asia Pacific region.

 

Operating income increased due to a $49 million benefit from higher sales volume from all businesses, a $36 million reduction in manufacturing costs, $19 million in increased selling prices, the absence of $2 million in accelerated depreciation and a $1 million increase in equity income. These favorable trends were partly offset by $47 million in higher raw material costs, a $14 million increase in distribution costs, $6 million in unfavorable foreign currency translation, $5 million in higher SGA&R expense, a $5 million increase in REACh costs and a $2 million reduction in income from the sale of the natural sodium sulfonates and oxidized petrolatum product lines.

 

Industrial Engineered Products

 

Industrial Engineered segment net sales increased by $216 million or 42% to $728 million in 2010. Operating income increased by $22 million to $25 million in 2010.

 

The increase in net sales reflected $178 million increase in sales volume from all businesses and $40 million in higher selling prices, partly offset by $2 million in unfavorable foreign currency translation. Products sold to electronic applications showed the most dramatic year-over-year improvement together with a modest recovery in demand from building and construction and consumer durable polymer applications from the low levels of demand in 2009.

 

Operating income increased primarily due to a $40 million increase in selling prices, a $28 million benefit from higher sales volume (net of unfavorable product mix), a $20 million reduction in manufacturing costs (primarily due to the higher plant utilization) and a $3 million increase in equity income. These favorable items were partially offset by a $32 million increase in raw material costs, $28 million in accelerated depreciation related to restructuring activities, $3 million in higher SGA&R expense, $3 million in unfavorable foreign currency exchange, $2 million in higher REACh costs and $1 million in higher distribution costs.

 

Consumer Products

 

Consumer Products segment net sales increased $1 million to $458 million in 2010. Operating income increased $4 million to $67 million in 2010.

 

The increase in net sales was driven by increased sales volume of $4 million and favorable foreign currency translation of $3 million, partially offset by lower selling prices of $6 million. The North American recreational water products business benefited overall from a warmer and dryer summer in 2010 compared with 2009 driving higher volumes though dealer channels and many of our largest mass market customers. This revenue growth was offset in part by reduced demand from certain mass market customers and lower household cleaner product sales.

 

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Operating income increased due to $8 million in lower manufacturing costs, $3 million from increased sales volume and favorable product mix, and $3 million in favorable foreign currency exchange. These benefits were partially offset by $6 million in lower selling prices, a $1 million increase in raw material and energy costs, a $1 million increase in distribution costs and a $2 million increase in other costs.

 

Chemtura AgroSolutions

 

Chemtura AgroSolutions segment net sales increased by $19 million or 6% to $351 million in 2010. However, operating profit of $21 million in 2010 decreased by $21 million compared with 2009. The increase in net sales reflected a $21 million benefit from higher sales volume, partly offset by lower selling prices of $1 million and unfavorable foreign currency translation of $1 million. Demand in Europe was impacted by the reduced availability of credit to growers in the first quarter of 2010, the impact of a prolonged winter and a drought in western Russia and the Ukraine. Demand in both our North American and Asia Pacific regions improved significantly in 2010 while Latin America experienced flat demand.

 

Operating income decreased due to $18 million in higher SGA&R expense, $3 million of unfavorable manufacturing costs, a $3 million impact from an unfavorable decision in a long standing Canadian trade dispute, $2 million in higher distribution costs, $1 million from lower selling prices and a $4 million increase in other costs. These unfavorable items were partially offset by a $6 million benefit from higher sales volume, $2 million in lower raw material costs and $2 million from favorable foreign currency translation. Approximately $6 million of the increase in SGA&R expense related to expenses associated with the internal review of customer incentive, commission and promotional payment practices in the European region. The remaining SGA&R increase related to R&D investments in new products and registrations and programs to drive sales growth in subsequent periods.

 

General Corporate

 

Corporate expense was $102 million in 2010, which included $37 million of amortization expense related to intangible assets. In comparison, corporate expense was $106 million in 2009, which included $38 million of amortization expense related to intangible assets.

 

The $4 million decrease in corporate expense was primarily due to reduced spending on information technology initiatives, which included completion of the Consumer Products segment SAP implementation project and asset dispositions in 2009, and lower depreciation and amortization expense, partially offset by higher expenses related to European pension plans, environmental reserve adjustments and stock-based compensation expense.

 

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Adjusted EBITDA

 

Adjusted EBITDA is a financial measure that is not calculated or presented in accordance with generally accepted accounting principles (“GAAP”). While we believe that such measures are useful in evaluating our performance, investors should not consider them to be a substitute for financial measures prepared in accordance with GAAP. In addition, the financial measures may differ from similarly titled financial measures used by other companies and do not provide a comparable view of our performance relative to other companies in similar industries. Adjusted EBITDA for 2011, 2010 and 2009 is calculated as follows:

 

(In millions)  2011   2010   2009 
             
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)
                
Plus: Interest expense   63    191    70 
Plus: Loss on early extinguishment of debt   -    88    - 
Plus: Other expense, net   -    6    17 
Plus: Reorganization items, net   19    303    97 
Plus: Income tax expense   25    22    10 
Plus: Loss from discontinued operations, net of tax   -    1    63 
Plus: Loss on sale of discontinued operations, net of tax   -    12    3 
Plus: Net earnings attributable to non-controlling interests   1    1    1 
                
Operating income (loss)   227    38    (32)
                
Plus: Depreciation and amortization   140    175    162 
Plus: Operational facility closures, severance and related costs   3    1    3 
Plus: Antitrust costs   -    -    10 
Less: Gain on sale of business   (27)   (2)   - 
Plus: Impairment charges   4    57    39 
Plus: Changes in estimates related to expected allowable claims   3    35    73 
Plus: Non-cash stock-based compensation   26    8    3 
Plus: Loss on disposal of assets   1    2    - 
Plus: Other non-recurring adjustments   -    6    2 
Plus: UK pension benefit matter   8    -    - 
Adjusted EBITDA  $385   $320   $260 

 

LIQUIDITY AND CAPITAL RESOURCES

 

On October 18, 2011, we announced that our Board of Directors (the “Board”) had authorized us to repurchase up to $50 million of our new common stock over the next twelve months. 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”). As of December 31, 2011, the cumulative authorized repurchase allowance was $50 million, of which we had purchased 2 million shares for $22 million. The remaining allowance under the program was approximately $28 million.

 

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.

 

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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.

 

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.

 

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

 

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.

 

For further discussion of the Chapter 11 cases, see Note 18 – Emergence from Chapter 11 in our Notes to Consolidated Financial Statements.

 

Financing Facilities

 

In 2010, in order to fund our Plan, emerge from Chapter 11 and provide for future capital needs, we obtained approximately $1 billion in financing. 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 the Effective Date, 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 December 31, 2011, we had no borrowings under the ABL Facility, but we had $15 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 approximately $201 million 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 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 December 31, 2011, we were in compliance with the covenant requirements of these financing facilities.

 

For further discussion of the financing facilities, see Note 8 – Debt in the Notes to our Consolidated Financial Statements.

 

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. We had no outstanding borrowings under the A/R Financing Facility, for the period ending December 31, 2011.

 

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Cash Flows from Operating Activities

 

Net cash provided by operating activities was $182 million in 2011, net cash used in operating activities was $204 million in 2010 and net cash provided by operating activities was $49 million in 2009. Changes in key accounts are summarized below:

 

Favorable (unfavorable)            
(In millions)  2011   2010   2009 
Accounts receivable  $13   $(77)  $36 
Impact of accounts receivable facilities   -    -    (103)
Inventories   (24)   (36)   85 
Restricted cash   -    (38)   - 
Accounts payable   (11)   70    16 
Pension and post-retirement health care liabilities   (82)   (61)   (26)
Liabilities subject to compromise   (8)   (195)   (31)

 

During 2011, accounts receivable decreased by $13 million driven by lower sales in the fourth quarter of 2011 compared to the fourth quarter of 2010 for the Consumer Products, the antioxidants product line of Industrial Performance and Chemtura AgroSolutions segments. There was an overall improvement in the our days sales outstanding. Inventory increased $24 million during 2011 reflecting increased cost of raw materials, lower sales volumes and the overall decrease in the reserves reflecting the efforts to reduce slow moving and obsolete goods. Accounts payable decreased by $11 million during 2011 primarily due to the payment of approximately $23 million of Chapter 11 related legal and professional fees accrued in 2010. There was a slight increase in the days payable outstanding. Pension and post-retirement health care liabilities decreased due to the funding of benefit obligations. Contributions to our pension plans amounted to $96 million in 2011, including $34 million for domestic plans and $62 million for the international plans. Liabilities subject to compromise related to operating activities decreased by $8 million in 2011, primarily due to the payment in cash of certain pre-petition liabilities in accordance with the Plan. Cash flows from operating activities in 2011 were adjusted by the impact of certain non-cash and other charges, which primarily included depreciation and amortization expense of $140 million, a gain of the sale of a business of $27 million, stock-based compensation expense of $26 million, provision for doubtful accounts of $7 million and impairment charges of $4 million.

 

During 2010, accounts receivable increased by $77 million. The increase in accounts receivable was driven by increased volume principally within the Industrial Performance and Industrial Engineered segments as the industries we supply in these segments were most severely affected by the economic slowdown in 2009 as demand declined sharply and customers undertook de-stocking in light of the changes in the economy. With available liquidity in 2010, we were able to resume our historic practice of building inventory ahead of the higher seasonal demand for some of our products and, as such, inventory increased $36 million during 2010. Accounts payable increased by $70 million in 2010 primarily a result of growth in raw material and capital purchases, improved vendor credit terms and timing of professional fee payments related to Chapter 11 proceedings. Pension and post-retirement health care liabilities decreased by $61 million primarily due to the funding of benefit obligations. Contributions amounted to $83 million in 2010, which included $69 million for domestic plans (includes a $50 million contribution in accordance with the Plan) and $14 million for international plans. Liabilities subject to compromise related to operating activities decreased by $195 million in 2010 (excluding pre-petition debt settlements), primarily due to the payment in cash of certain pre-petition liabilities as part of the consummation of the Plan. Cash flows from operating activities in 2010 were adjusted by the impact of certain non-cash and other charges, which primarily included reorganization items, net of $186 million, depreciation and amortization expense of $175 million, contractual post-petition interest expense of $113 million, a loss on early extinguishment of debt of $88 million (which included the settlement of certain “make-whole” and “no-call” claims), impairment charges of $60 million, change in estimates related to expected allowable claims of $35 million, a deferred tax expense of $34 million, a loss on sale of discontinued operations of $12 million and stock-based compensation expense of $10 million.

 

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During 2009, we generated net cash from operating activities of $49 million. The cash provided was a combination of our net loss of $292 million, adjusted for non-cash amounts during the period including depreciation and amortization of $173 million, impairment charges of $104 million, changes in estimates related to expected allowable claims of $73 million and reorganization items of $35 million. In addition, inventory decreased $85 million due to lower raw material and energy costs as well as the execution of inventory reduction initiatives and lower demand, accounts receivable decreased $36 million driven by reduced sales and the benefit of our collection efforts and accounts payable increased $16 million primarily due to the timing of vendor payments. Offsetting these net inflows of cash was a decrease in proceeds from the sale of accounts receivables under our accounts receivable financing facilities of $103 million (due to the termination of the U.S. accounts receivable facility and restricted availability and access to our European accounts receivable financing facility), liabilities subject to compromise were affected by payments of $31 million against prepetition liabilities and pension and post-retirement healthcare liabilities decreased by $26 million, primarily due to contributions.

 

Cash Flows from Investing and Financing Activities

 

Investing Activities

 

Net cash used in investing activities was $181 million for 2011. Investing activities were primarily related to $154 million in capital expenditures for U.S. and international facilities, environmental and other compliance requirements, as well as payments related to the formation of joint ventures of $35 million, which included $29 million for ISEM S.r.l. and $6 million for DayStar Materials, LLC, partially offset by $8 million received from the divestment of the oleochemical business in 2008.

 

Net cash used in investing activities was $81 million for 2010. Investing activities were primarily related to capital expenditures of $124 million for U.S. and foreign facilities, including environmental and other compliance requirements, partially offset by proceeds of $43 million from the sale of the PVC additives business and the sale of the natural sodium sulfonates and oxidized petrolatum product lines.

 

Net cash used in investing activities was $58 million for 2009, which reflected capital expenditures amounted to $56 million primarily related to U.S. and foreign facilities, the enterprise resource planning (“ERP”) initiatives, and environmental and other compliance requirements, and $5 million of net cash paid as deferred consideration for a prior year acquisition offset by net proceeds from prior year divestments of the oleochemicals and fluorine chemicals businesses of $3 million.

 

Financing Activities

 

Net cash used in financing activities was $18 million for 2011, which included shares acquired under our share repurchase program of $22 million offset by proceeds from short term borrowings of $3 million and proceeds from the exercise of stock options of $1 million.

 

Net cash provided by financing activities was $251 million for 2010, which included proceeds from the Senior Notes of $452 million and proceeds from the Term Loan of $292 million as part of the Chapter 11 exit financing. These items were offset by the net repayments on the Amended DIP Credit Facility and DIP Credit facility of $251 million during 2010 which were paid in full; the cash repayment of pre-petition debt of $192 million; debt issuance and refinancing costs of $40 million; and cash payments for the settlement of certain “make-whole” and “no-call” claims of $10 million.

 

Net cash provided by financing activities was $173 million for 2009, which included proceeds from the DIP Credit Facility of $250 million, partially offset by payments of debt issuance costs on the DIP Credit Facility of $30 million, net repayments on the 2007 Credit Facility of $28 million, and net payments on other borrowings of $19 million.

 

Settlements of Liabilities Subject to Compromise and Disputed Claims

 

In 2011, we settled approximately $41 million of disputed claims asserted in our Chapter 11 cases in $33 million of restricted cash and $8 million of cash. These settlements were comprised of $27 million for environmental items, $10 million for general unsecured claims, $2 million for disputed cure claims and $2 million for general unsecured claims subject to segregated reserves. Additionally we issued approximately $33 million of New Common Stock for the settlement of certain other disputed claims in accordance with the Plan.

 

In 2010, we settled approximately $373 million of liabilities subject to compromise in cash upon our bankruptcy emergence. Additionally we issued approximately $1.4 billion of New Common Stock for the settlement of liabilities subject to compromise in accordance with the Plan.

 

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Contractual Obligations and Other Cash Requirements

 

We have obligations to make future cash payments under contracts and commitments, including long-term debt agreements, lease obligations, environmental liabilities, post-retirement health care liabilities, facility closures, severance and related costs, and other long-term liabilities.

 

The following table summarizes our significant contractual obligations and other cash commitments as of December 31, 2011. Payments associated with bankruptcy claims not yet allowed in the Chapter 11 cases as of the Effective Date (referred to as disputed claims) have been excluded from the table below given the inherent uncertainties associated with these claims.

 

(In millions)      Payments Due by Period 
                               2017 and 
Contractual Obligations*      Total   2012   2013   2014   2015   2016   Thereafter 
Total debt (including capital leases)   (a)   $756   $6   $-   $-   $-   $295   $455 
Operating leases   (b)    75    13    12    10    8    8    24 
Facility closures, severance and related cost liabilities   (c)    1    1    -    -    -    -    - 
Capital expenditures   (d)    20    20    -    -    -    -    - 
Interest payments   (e)    340    54    54    54    54    52    72 
Unconditional purchase obligations   (f)    6    2    2    1    1    -    - 
Subtotal - Contractual Obligations        1,198    96    68    65    63    355    551 
Environmental liabilities   (g)    89    19    18    11    8    6    27 
Post-retirement health care liabilities   (h)    116    10    9    9    9    9    70 
Unrecognized tax benefits   (i)    72    21    1    3    5    -    42 
Other long-term liabilities (excluding pension liabilities)        33    1    5    1    4    2    20 
Total cash requirements       $1,508   $147   $101   $89   $89   $372   $710 

 

*Additional information is provided in various footnotes (including Debt, Leases, Legal Proceedings and Contingencies, Pension and Other Post-Retirement Plans, Restructuring and Asset Impairment Activities, and Income Taxes) in our Notes to Consolidated Financial Statements.

 

(a)Our debt agreements include various notes and bank loans for which payments will be payable through 2018. The future minimum lease payments under capital leases at December 31, 2011 were not significant. Obligations by period reflect stated contractual due dates.
(b)Represents operating lease obligations primarily related to buildings, land and equipment. Such obligations are net of future sublease income and will be expensed over the life of the applicable lease contracts.
(c)Represents estimated payments from accruals related to our cost reduction programs.
(d)Represents capital commitments for various open projects.
(e)Represents interest payments and fees related to our Senior Notes, Term Loan, ABL Facility and other debt obligations outstanding at December 31, 2011. Assumed interest rates are based upon rates in effect at December 31, 2011.
(f)Primarily represents unconditional purchase commitments to purchase raw materials and tolling arrangements with outside vendors.
(g)We have ongoing environmental liabilities for future remediation and operating and maintenance costs directly related to remediation. We estimate that the ongoing environmental liability could range up to $107 million. We have recorded a liability for ongoing environmental remediation of $88 million at December 31, 2011.
(h)We have post-retirement health care plans that provide health and life insurance benefits to certain retired and active employees and their beneficiaries. These plans are generally not pre-funded and expenses are paid by us as incurred, with the exception of certain inactive government related plans that are paid from plan assets.
(i)We have recorded a liability for unrecognized tax benefits of $72 million at December 31, 2011 which do not reflect competent authority offsets of $26 million, which are reflected as assets in our balance of unrecognized tax benefits.

 

During 2011, we made payments of $25 million and $2 million for operating leases and unconditional purchase obligations, respectively.

 

We fund our defined benefit pension plans based on the minimum amounts required by law plus additional voluntary contribution amounts we deem appropriate. Estimated future funding requirements are highly dependent on factors that are not readily determinable. These include changes in legislation, returns earned on pension investments, labor negotiations and other factors related to assumptions regarding future liabilities. In 2011, we made contributions of $83 million to our domestic and international pension plans and $11 million to our post-retirement benefit plans (including payments made by us directly to plan participants). See “Critical Accounting Estimates” below for details regarding current pension assumptions. To the extent that current assumptions are not realized, actual funding requirements may be significantly different from those described below. The following table summarizes the estimated future funding requirements for defined benefit pension plans under current assumptions:

 

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   Funding Requirements by Period 
(In millions)  2012   2013   2014   2015   2016 
Qualified domestic pension plans  $40   $40   $41   $39   $35 
International and non-qualified pension plans   34    23    23    10    10 
Total pension plans  $74   $63   $64   $49   $45 

 

As previously disclosed, on December 22, 2010, the UK Pensions Regulator issued a “warning notice” to us, stating their intent to request authority to issue a “financial support direction” against us for the support of the benefit obligations under one of our UK pension plans. Our UK subsidiary that is responsible for this plan has entered into definitive agreements with the trustees of that plan over the terms of a “recovery plan” which provided for a series of additional cash contributions to be made to reduce its underfunding over time and the UK Pensions Regulator withdrew the “warning notice.” The agreements provided, among other things, for our UK subsidiary to make cash contributions of £60 million (approximately $95 million) in just over a three year period, with the initial contribution of £30 million ($49 million) made in the second quarter of 2011. The agreements also provide for the granting of both a security interest and a guarantee to support certain of the liabilities under this pension plan. Obligations associated with these payments have been included in the above funding table.

 

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 has been 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.

 

We have substantial U.S. net operating losses (“NOLs”) as described in Note 10 - Income Taxes to our Consolidated Financial Statements. While our utilization of these NOLs is subject to annual federal NOL limitations under Internal Revenue Code (“IRC”) Section 382, we expect they will substantially reduce the amount of U.S. cash tax payments we are required to make in the foreseeable future.

 

Other Sources and Uses of Cash

 

We expect to finance our continuing operations and capital spending requirements for 2012 with cash flows provided by operating activities, available cash and cash equivalents, borrowings under our ABL Facility, utilization of the A/R Financing Facility and other sources. Cash and cash equivalents as of December 31, 2011 were $180 million.

 

Strategic Initiatives

 

We continually review each of our businesses, individually and as part of our portfolio to determine whether to continue in, consolidate, reorganize, exit or expand our businesses, operations and product lines. In each case, we examine whether, on a short-term or long-term basis, the business, operation or product line constitutes a strategic fit with our products, contributed to our financial health and will achieve our business objectives. If it does not, we will implement initiatives which may include, among other things, limiting or exiting the business, operation or product line, consolidating operations or facilities or selling or otherwise disposing of the business or asset. Our review process also involves expanding businesses, investing in innovative and regional growth, product lines and bringing new products to market or changing the way do business.

 

The following items are the result of our newly implemented and proposed business initiatives during 2011:

 

·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, which is expected to amount to approximately $2 million per year from each partner for five years, which began in 2011. We will fund our contributions in part by a reduction in our planned direct research and development spending starting in 2012.

 

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·On February 1, 2011, we announced the formation of DayStar Materials, LLC (“DayStar”), 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 May 23, 2011, we announced the signing of a letter of intent with Archean Group to establish a strategic alliance in bromine and brominated derivatives in India. This alliance is expected to strengthen the brominated performance products business of our Industrial Engineered Products segment by providing it with a strong position to respond to customer demand from a cost-competitive and consistent Indian supply.

 

·On June 6, 2011, we announced our intent to build a new multi-purpose manufacturing facility in Nantong, China to support our growth strategy for the Asia-Pacific region. This new manufacturing capacity will initially serve the petroleum additives and urethanes businesses within our Industrial Performance segment, and will allow us to serve the growing regional demand for these product lines.

 

·On July 28, 2011, we announced our plan to establish a European manufacturing capability for our Synton® line of high-viscosity polyalphaolefin (“HVPAO”) synthetic basestocks. This increased capacity will support our ability to meet the increasing global demand for these products by locating production capacity in a region of significant demand growth, and will enhance our service levels to continue to meet our customer commitments. Engineering work has commenced to enable production of the Synton® 40 and Synton® 100 HVPAO products at our facility in Ankerweg, Amsterdam, The Netherlands in 2013.

 

·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. The first payment is due in April 2012. A pre-tax gain of $27 million was recorded on the sale.

 

Reorganization Items

 

We recorded $19 million, $303 million and $97 million in 2011, 2010 and 2009, respectively. We incurred substantial expenses resulting from our Chapter 11 cases. Such amounts are presented as reorganization items, in our Consolidated Statements of Operations and represent the direct and incremental costs related to our Chapter 11 cases such as professional fees, net, impacts related to the resolution of claims in the Chapter 11 cases and rejections or terminations of executory contracts and real property leases. We will continue to incur reorganization related expenses in 2012 primarily for professional fees, but at a much reduced amount until all outstanding claims are resolved. For additional information on reorganization items, net, see Note 18 - Emergence from Chapter 11 in the Notes to Consolidated Financial Statements.

 

Guarantees

 

In addition to the letters of credit of $15 million and $12 million outstanding at December 31, 2011 and 2010, respectively, we have guarantees that have been provided to various financial institutions at December 31, 2011 and 2010, of $10 million and $6 million, respectively. The letters of credit and guarantees were primarily related to insurance obligations, environmental obligations, banking credit facilities, vendor deposits and European value added tax (“VAT”) obligations. We also had $8 million and $15 million of third party guarantees at December 31, 2011 and 2010, respectively, for which we have reserved $1 million and $2 million at December 31, 2011 and 2010, respectively, which representing the probability weighted fair value of these guarantees.

 

In addition, the Company has a financing agreement with a bank in Brazil for certain customers under which the Company receives funds from the bank at invoice date, and in turn, the customer agrees to pay the bank on the due date.  The Company provides a full recourse guarantee to the bank in the event of customer non-payment.

 

Critical Accounting ESTIMATES

 

Our Consolidated Financial Statements have been prepared in conformity with GAAP, which require us to make estimates and assumptions that affect the amounts and disclosures reported in our Consolidated Financial Statements and accompanying notes. Accounting estimates and assumptions described in this section are those we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, we note that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Actual results could differ from such estimates. The following discussion summarizes our critical accounting estimates. Significant accounting policies used in the preparation of our Consolidated Financial Statements are discussed in our Notes to Consolidated Financial Statements.

 

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Carrying Value of Goodwill and Long-Lived Assets

 

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 16 – 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 value allocation of the assets and liabilities of the reporting unit utilizing the acquisition method of accounting.

 

We continually monitor and evaluate business and competitive conditions that affect our operations and reflect 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.

 

We recorded asset impairment charges of $4 million, $60 million and $104 million in 2011, 2010 and 2009, respectively. See Note - 3 Restructuring and Asset Impairment Activities in our Notes to Consolidated Financial Statements.

 

Environmental Matters

 

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 cleanup costs associated with hazardous waste disposal sites and natural resource damages. As part of the Chapter 11 cases, under the Plan, the Debtors retained responsibility for environmental cleanup liabilities relating to currently owned or operated sites (i.e. sites that were part of the Debtors’ estates) and, with certain exceptions, discharged or settled liabilities relating to formerly owned or operated sites (i.e. sites that were no longer part of the Debtors’ estates) and third-party sites (i.e. sites that never were part of the Debtors’ estates).

 

Each quarter, we evaluate and review estimates for future remediation, operation and management costs directly related to remediation, 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 are probable and reasonably estimable.

 

As of December 31, 2011, our reserve for ongoing environmental remediation activities totaled $88 million. We estimate that ongoing environmental liabilities could range up to $107 million at December 31, 2011. Our ongoing reserves include estimates for determinable clean-up costs. 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.

 

In addition, it is possible that 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.

 

We intend to assert all meritorious legal defenses and will pursue other equitable factors that are available with respect to these matters. The resolution of environmental matters asserted against us could require us to pay remedial costs or damages, which are not currently determinable, that could exceed our present estimates, and as a result could have, either individually or in the aggregate, a material adverse effect on our financial condition, results of operations or cash flows.

 

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Pension and Other Post-Retirement Benefits Expense

 

As part of our financial restructuring under Chapter 11, we proposed reductions in the caps on the level of domestic postretirement medical benefits a group of retirees, the Uniroyal salaried retirees, which the modifications have not yet been approved by the Bankruptcy Court and are therefore not reflected in the financial position, or in any of the estimates presented in this discussion. In November 2011, we reached an agreement in principle with the steering committee of the Uniroyal salaried retirees, resolving all disputes concerning our motion requesting authorization to modify certain post-retirement welfare benefits. The agreement in principle remains subject to documentation, execution by the parties and Bankruptcy Court approval upon notice to all Uniroyal salaried retirees. For more information about the proposed settlement, see Note 14 – Pension and Other Post-Retirement Plans in our Notes to Consolidated Financial Statements.

 

Our calculation of pension and other post-retirement benefits expense is dependent on a number of assumptions. These assumptions include discount rates, health care cost trend rates, expected long-term rates of return on plan assets, mortality rates, expected salary and wage increases, and other relevant factors.  Components of pension and other post-retirement benefits expense include interest and service costs on the pension and other post-retirement benefit plans, expected return on plan assets and amortization of certain unrecognized costs and obligations.  Actual results that differ from the assumptions utilized are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods.  While we believe that the assumptions used are appropriate, differences in actual experience or significant changes in assumptions would affect our pension and other post-retirement benefits costs and obligations.

 

Pension Plans

 

Pension liabilities are measured on a discounted basis and the assumed discount rate is a significant assumption. At each measurement date, the discount rate is based on interest rates for high-quality, long-term corporate debt securities with maturities comparable to our liabilities. At December 31, 2011, we utilized a discount rate of 4.60% for our domestic qualified pension plan compared to 5.10% at December 31, 2010.  For the international and non-qualified plans, a weighted average discount rate of 4.85% was used at December 31, 2011, compared to 5.25% used at December 31, 2010. As a sensitivity measure, a 25 basis point reduction in the discount rate for all plans would result in less than a million decrease in pre-tax earnings for 2012.

 

Domestic discount rates adopted at December 31, 2011 utilized an interest rate yield curve to determine the discount rate pursuant to guidance codified under ASC Topic 715, Defined Benefit Plans (“ASC 715”). The yield curve is comprised of AAA/AA bonds with maturities between zero and thirty years.  We discounted the annual cash flows of our domestic pension plans using this yield curve and developed a single-point discount rate matching the respective plan’s payout structure.

 

A similar approach was used to determine the appropriate discount rates for the international plans. The actual method used varies from country to country depending on the amount of available information on bond yields to be able to estimate a single-point discount rate to match the respective plan’s benefit disbursements.

 

Our weighted average estimated rate of compensation increase was 3.88% for applicable domestic and international pension plans combined at December 31, 2011.  As a sensitivity measure, an increase of 25 basis points in the estimated rate of compensation increase would decrease pre-tax earnings for 2012 by an immaterial amount.

 

The expected return on pension plan assets is based on our investment strategy, historical experience, and expectations for long-term rates of return. We determine the expected rate of return on plan assets for the domestic and international pension plans by applying the expected returns on various asset classes to our target asset allocation.

 

We utilized a weighted average expected long-term rate of return of 7.75% on all domestic plan assets and a weighted average rate of 6.80% for the international plan assets for the year ended December 31, 2011.

 

Historical returns are evaluated based on an arithmetic average of annual returns derived from recognized passive indices, such as the S&P 500, for the major asset classes. We looked at the arithmetic averages of annual investment returns from passive indices, assuming a portfolio of investments that follow the current target asset allocation for the domestic plans over several business cycles, to obtain an indication of the long-term historical market performance. The arithmetic average return over the past 20 years was 7.99%, and over the past 30 years it was 10.83%. Both of these values exceeded the 7.75% domestic expected return on assets.

 

The high volatility of stock markets as well as the drop in bond yields in 2011 impacted the investment performance of our pension plan assets. The actual annualized return on plan assets for the domestic plans for the 12 months ended December 31, 2011 was approximately 11.3% (net of investment expenses), which was above the expected return on asset assumption for the year. The international plans realized a weighted average return of approximately 3.9% in local currency terms and approximately 2.7% in U.S. dollar terms . This resulted in currency losses of approximately $4 million on plan assets, which were partially offset by currency gains of approximately $3 million on benefit obligations for the international pension arrangements.

 

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Our target asset allocation for the domestic pension plans is based on investing 50% of plan assets in equity instruments, 45% of plan assets in fixed income investments and 5% in real estate. At December 31, 2011, 42% of the portfolio was invested in equities, 51% in fixed income investments and 7% in real estate and other investments.

 

We have unrecognized actuarial losses relating to our pension plans which have been included in our Consolidated Balance Sheet, but not in our Consolidated Statements of Operations. The extent to which these unrecognized actuarial losses will impact future pre-tax earnings depends on whether the unrecognized actuarial losses are deferred through the asset-smoothing mechanism (the market related value as defined by ASC Topic 715-30, Defined Benefit Plans – Pensions (“ASC 715-30”)), or through amortization in pre-tax earnings to the extent that they exceed a 10% amortization corridor, as defined by ASC 715-30, which provides for amortization over the average remaining participant career or life. The amortization of unrecognized net losses existing as of December 31, 2011 will result in a $17 million decrease to pre-tax earnings for 2012 ($15 million for the qualified domestic plans and $2 million for the international and non-qualified plans). Since future gains and losses beyond 2011 are a result of various factors described herein, it is not possible to predict with certainty to what extent the combination of current and future losses may exceed the 10 percent amortization corridor and thereby be subject to further amortization. At the end of 2011, unrecognized net losses amounted to $399 million for the qualified domestic plans and $73 million for the international and non-qualified plans. Of these amounts, $5 million of unrecognized gains for the domestic plans and $4 million of unrecognized losses for the international plans are deferred through the asset smoothing mechanism as required by ASC 715.

 

The pre-tax pension expense for all pension plans was $12 million in 2011. Pension (income) expense is calculated based upon certain assumptions including discount rate, expected long-term rate of return on plan assets, mortality rates and expected salary and wage increases.  Actual results that differ from the current assumptions utilized are accumulated and amortized over future periods and will affect pension expense in future periods.  The following table estimates the future pension expense, based upon current assumptions:

 

   Pension Expense (Income) By Year 
(In millions)  2012   2013   2014   2015   2016 
Qualified domestic pension plans  $4   $3   $(2)  $(8)  $(13)
International and non-qualified pension plans   4    4    2    1    (1)
Total pension plans  $8   $7   $-   $(7)  $(14)

 

The following tables show the impact of a 100 basis point change in the actual return on assets on the pension (income) expense.

 

   Change in Pension Expense (Income) By Year 
   2012   2013   2014   2015   2016 
Increase (decrease)  100 Basis Point Increase in Investment Returns 
Qualified domestic pension plans  $-   $-   $(1)  $(1)  $(2)
International and non-qualified pension plans   -    -    -    (1)   (1)
Total pension plans  $-   $-   $(1)  $(2)  $(3)

 

Increase (decrease)  100 Basis Point Decrease in Investment Returns 
Qualified domestic pension plans  $-   $-   $1   $1   $2 
International and non-qualified pension plans   -    -    -    1    1 
Total pension plans  $-   $-   $1   $2   $3 

 

Other Post-Retirement Benefits

 

We provide post-retirement health and life insurance benefits for current retired and active employees and their beneficiaries and covered dependents for certain domestic and international employee groups.

 

The discount rates we adopted for the valuation of the post-retirement health care plans were determined using the same methodology as for the pension plans. At December 31, 2011, we utilized a weighted average discount rate of 4.26% for post-retirement health care plans, compared to 4.78% at December 31, 2010. As a sensitivity measure, a 25 basis point reduction in the discount rate would result in less than a million impact in pre-tax earnings for 2012.

 

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Assumed health care cost trend rates are based on past and current health care cost trends, considering such factors as health care inflation, changes in health care utilization or delivery patterns, technological advances, and the overall health of plan participants.  We use health care trend cost rates starting with a weighted average initial level of 7.5% for the domestic arrangements and grading down to an ultimate level of 5%. For the international arrangements, the weighted average initial rate is 8.50%, grading down to 5%.

 

The pre-tax post-retirement healthcare expense was $2 million in 2011.  The following table summarizes projected post-retirement benefit expense based upon the various assumptions discussed above.

 

(In millions)  Pre-Tax Expense by Year 
   2012   2013   2014   2015   2016 
Domestic and international post-retirement benefit plans  $3   $3   $2   $2   $2 

 

Income Taxes

 

Income taxes payable reflect our current tax provision and management’s best estimate of the current tax liability relating to the outcome of uncertain tax positions. If the actual outcome of uncertain tax positions differs from our best estimates, an adjustment to income taxes payable could be required, which may result in additional income tax expense or benefit.

 

We record deferred tax assets and liabilities based on differences between the book and tax basis of assets and liabilities using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. We also record deferred tax assets for the expected future tax benefits of net operating losses and income tax credit carryforwards.

 

Valuation allowances are established when we determine that it is more likely than not that the results of future operations will not generate sufficient taxable income to realize our deferred tax assets. We consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. Thus, changes in future results of operations could result in adjustments to our valuation allowances.

 

We consider undistributed earnings of certain foreign subsidiaries to be indefinitely invested in their operations. At December 31, 2011, such undistributed earnings amounted to $753 million. As a result of our emergence from Chapter 11 in 2010, and the significant reduction in debt, we have determined that we will no longer need to repatriate certain undistributed earnings of our foreign subsidiaries to fund U.S. operations. Also, we have plans to invest such undistributed earnings indefinitely. As such, the amount of foreign subsidiaries undistributed earnings considered to be indefinitely invested in their foreign operations has increased. The effect of such change in the year ended December 31, 2011 is a reduction of $3 million in U.S. deferred income tax liability on such undistributed earnings. In 2011, this reduction in U.S. taxes on unremitted foreign earnings has been offset by an equal increase in the valuation allowance related to U.S. deferred tax assets, and as such had no net effect on tax expense recognized in our Consolidated Statement of Operations. Repatriation of undistributed earnings, currently deemed indefinitely reinvested, would require us to accrue and pay taxes in the future. Estimating the tax liability that would arise if these earnings were repatriated is not practicable at this time.

 

We file income tax returns in the U.S (including federal and state) and foreign jurisdictions. The income tax returns for our entities taxable in the U.S. and significant foreign jurisdictions are open for examination and adjustment. We assess our income tax positions and record a liability for all years open to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. The economic benefit associated with a tax position will only be recognized if it is more likely than not that a tax position ultimately will be sustained. We adjust these liabilities, if necessary, upon the completion of tax audits or changes in tax law.

 

We have a liability for unrecognized tax benefits of $46 million and $41 million at December 31, 2011 and 2010, respectively. This increase is primarily related to a foreign tax matter dating back to the 1990s.

 

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Accounting Developments

 

For information on accounting developments, see Note 1 – Nature of Operations and Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.

 

OUTLOOK

 

Our vision is to create a focused portfolio of global specialty chemical businesses that provide sustainable competitive advantage and continued growth opportunities through superior innovation, reliability, and applied science, making Chemtura indispensable to its stakeholders. We will deliver continuous value-accreting growth by leveraging our in-depth knowledge and expertise in the electronics and energy, transportation and agriculture industries, achieving geographic balance through investment in the faster growing regions and utilizing a systematic process of product and application innovation and extension.

 

We ended 2011 with our Industrial segments experiencing softer demand condition and experiencing reduced demand from the electronics industry, particularly in the production of printed wiring boards. Demand from our industrial customers so far in 2012 has been comparable to what we saw in the second half of 2011 and we have not yet seen recovery in the electronics markets. We expect industrial demand to begin to recover before summer and then build in the second half of the year. In this environment, the challenge for our Industrial segments will be to match 2011 performance in the first half of 2012 and then surpass 2011 in the second half of the year. Our Industrial segments expect to deliver improvement for 2012 as a whole. A more positive economic environment will provide more rapid performance improvement.

 

We expect stronger performance from our Consumer Products and Chemtura AgroSolutions segments in 2012. Our Consumer Products segment has regained the mass market customer it lost for the 2011 season and introduced new products and brands. The anticipated increase in sales volume is expected to drive stronger performance in 2012. Chemtura AgroSolutions has extended its product offerings, gained new product registrations and strengthened its distribution channels. The resulting new product introductions in 2012 is expected to drive further recovery by this segment over that achieved in 2011.

 

With the benefit of these performance trends, we expect 2012 to be another year of improvement, keeping us on track to achieve our objective of step-change growth in both revenue and profitability.

 

There are a number of risks to achieving our business plans as described in Item 1A - Risk Factors and summarized below in Forward Looking Statements.

 

Forward-Looking Statements

 

In addition to historical information, this Report contains “forward-looking statements” within the meaning of Section 27(a) of the Securities Act of 1933, as amended and Section 21(e) of the Exchange Act of 1934 as amended. We use words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements.

 

Such risks and uncertainties include, but are not limited to:

·The cyclical nature of the global chemicals industry;
·Increases in the price of raw materials or energy and our ability to recover cost increases through increased selling prices for our products;
·Disruptions in the availability of raw materials or energy;
·Our ability to implement our growth strategies in rapidly growing markets;
·Our ability to obtain the requisite regulatory and other approvals to implement the plan to build a new multi-purpose manufacturing facility in Nantong, China;
·Declines in general economic conditions;
·The European debt crisis;
·The ability to comply with product registration requirements of regulatory authorities, including the U.S. food and drug administration (the “FDA”) and European Union REACh legislation;
·The effect of adverse weather conditions;
·The ability to grow profitability in our Chemtura AgroSolutions segment;

 

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·Demand for Chemtura AgroSolutions segment products being affected by governmental policies;
·Current and future litigation, governmental investigations, prosecutions and administrative claims;
·Environmental, health and safety regulation matters;
·Federal regulations aimed at increasing security at certain chemical production plants;
·Significant international operations and interests;
·Our ability to maintain adequate internal controls over financial reporting;
·Exchange rate and other currency risks;
·Our dependence upon a trained, dedicated sales force;
·Operating risks at our production facilities;
·Our ability to protect our patents or other intellectual property rights;
·Whether our patents may provide full protection against competing manufacturers;
·Our ability to remain technologically innovative and to offer improved products and services in a cost-effective manner;
·The risks to our joint venture investments resulting from lack of sole decision making authority;
·Our unfunded and underfunded defined benefit pension plans and post-retirement welfare benefit plans;
·Risks associated with possible climate change legislation, regulation and international accords;
·The ability to support the carrying value of the goodwill and long-lived assets related to our businesses;
·Whether we repurchase any additional shares of our common stock that our Board of Directors has authorized us to purchase over twelve months and the terms on which any such repurchases are made;
·Our ability to execute on our long range plans; and

·Other risks and uncertainties detailed in Item 1A. Risk Factors in our filings with the Securities and Exchange Commission.

 

These statements are based on our estimates and assumptions and on currently available information. The forward-looking statements include information concerning our possible or assumed future results of operations, and our actual results may differ significantly from the results discussed. Forward-looking information is intended to reflect opinions as of the date this Form 10-K was filed. We undertake no duty to update any forward-looking statements to conform the statements to actual results or changes in our operations.

 

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Item 7A: Quantitative and Qualitative Disclosures About Market Risk

 

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 have short-term exposure to changes in foreign currency exchange rates resulting from transactions entered into by us and our foreign subsidiaries in currencies other than their local currency (primarily trade payables and receivables). We are also exposed to currency risk on intercompany transactions (including intercompany loans). We manage these transactional currency risks on a consolidated basis, which allows us to net our exposure. As a result of the Chapter 11 filing, our ability to hedge changes in foreign currency exchange rates resulting from transactions was restricted beginning in the first quarter of 2009. Now that we have emerged from Chapter 11, we may implement foreign exchange risk management programs during 2012 within what is permitted under our financing agreements.

 

When we are permitted by our financing agreements to enter into foreign currency forward and other contracts, such contracts generally are settled on a monthly basis. Realized and unrealized gains and losses on foreign currency forward contracts are recognized in other income (expense), net, to offset the impact of valuing recorded foreign currency trade payables, receivables and intercompany transactions. We do not enter into derivative financial instruments for trading or speculative purposes. No derivatives were outstanding as of December 31, 2011, 2010 and 2009.

 

The net effect of the realized and unrealized foreign currency gains and losses resulted in a pre-tax loss of $2 million, $11 million and $22 million in 2011, 2010 and 2009, respectively.

 

The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by stated maturity date for our debt. Weighted-average variable interest rates are based on the applicable floating rate index as of December 31, 2011.

 

Interest Rate Sensitivity

 

                       2017 and       Fair Value 
(In millions)  2012   2013   2014   2015   2016   Thereafter   Total   at 12/31/11 
Total debt:                                        
Fixed rate debt  $-   $-   $-   $-   $-   $455   $455   $473 
Average interest rate   7.88%   7.88%   7.88%   7.88%   7.88%   7.88%          
                                         
Variable rate debt  $6   $-   $-   $-   $295   $-   $301   $301 
Average interest rate (a)   5.57%   5.50%   5.50%   5.50%   5.50%   0.00%          

 

(a)Average interest rate is based on rates in effect at December 31, 2011.

 

54
 

 

Item 8: Financial Statements and Supplementary Data

 

CHEMTURA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2011, 2010 and 2009
(In millions, except per share data)

 

   2011   2010   2009 
             
NET SALES  $3,025   $2,760   $2,300 
                
COSTS AND EXPENSES               
Cost of goods sold   2,296    2,103    1,721 
Selling, general and administrative   339    315    289 
Depreciation and amortization   140    175    162 
Research and development   43    42    35 
Facility closures, severance and related costs   3    1    3 
Antitrust costs   -    -    10 
Gain on sale of business   (27)   (2)   - 
Impairment charges   4    57    39 
Changes in estimates related to expected allowable claims   3    35    73 
Equity income   (3)   (4)   - 
                
OPERATING INCOME (LOSS)   227    38    (32)
Interest expense (a)   (63)   (191)   (70)
Loss on early extinguishment of debt   -    (88)   - 
Other expense, net   -    (6)   (17)
Reorganization items, net   (19)   (303)   (97)
                
Earnings (loss) from continuing operations before income taxes   145    (550)   (216)
Income tax expense   (25)   (22)   (10)
                
Earnings (loss) from continuing operations   120    (572)   (226)
Loss from discontinued operations, net of tax   -    (1)   (63)
Loss on sale of discontinued operations, net of tax   -    (12)   (3)
Net earnings (loss)   120    (585)   (292)
                
Less: net earnings attributable to non-controlling interests   (1)   (1)   (1)
                
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)
                
BASIC AND DILUTED PER SHARE INFORMATION - ATTRIBUTABLE TO CHEMTURA:     
Earnings (loss) from continuing operations, net of tax  $1.19   $(2.58)  $(0.93)
Loss from discontinued operations, net of tax   -    -    (0.26)
Loss on sale of discontinued operations, net of tax   -    (0.05)   (0.01)
Net earnings (loss) attributable to Chemtura  $1.19   $(2.63)  $(1.20)
                
Basic weighted - average shares outstanding   100.1    223.0    242.9 
                
Diluted weighted - average shares outstanding   100.3    223.0    242.9 
                
AMOUNTS ATTRIBUTABLE TO CHEMTURA STOCKHOLDERS:               
Earnings (loss) from continuing operations, net of tax  $119   $(573)  $(227)
Loss from discontinued operations, net of tax   -    (1)   (63)
Loss on sale of discontinued operations, net of tax   -    (12)   (3)
Net earnings (loss) attributable to Chemtura  $119   $(586)  $(293)

 

(a)During 2010, $137 million of contractual interest expense was recorded relating to interest obligations on unsecured claims for the period March 18, 2009 through the November 10, 2010 that, as of the second quarter of 2010, were considered probable of being paid based on the plan of reorganization filed and later confirmed. Included in this amount is contractual interest expense of $63 million for 2009.

 

See Accompanying Notes to Consolidated Financial Statements.

 

55
 

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

As of December 31, 2011 and 2010

(In millions, except par value data)

 

   2011   2010 
ASSETS          
           
CURRENT ASSETS          
Cash and cash equivalents  $180   $201 
Restricted cash   5    32 
Accounts receivable   458    489 
Inventories   542    528 
Other current assets   136    171 
Total current assets   1,321    1,421 
           
NON-CURRENT ASSETS          
Property, plant and equipment   752    716 
Goodwill   174    175 
Intangible assets, net   392    429 
Non-current restricted cash   -    6 
Other assets   216    166 
           
Total Assets  $2,855   $2,913 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Short-term borrowings  $5   $3 
Accounts payable   173    191 
Accrued expenses   194    281 
Income taxes payable   18    14 
Total current liabilities   390    489 
           
NON-CURRENT LIABILITIES          
Long-term debt   748    748 
Pension and post-retirement health care liabilities   460    498 
Other liabilities   211    207 
Total liabilities   1,809    1,942 
           
STOCKHOLDERS' EQUITY          
Common stock - $.01 par value          
Authorized - 500.0 shares          
Issued - 98.3 shares in 2011 and 95.6 shares in 2010   1    1 
Additional paid-in capital   4,353    4,305 
Accumulated deficit   (2,949)   (3,068)
Accumulated other comprehensive loss   (346)   (276)
Treasury stock at cost - 2.0 shares in 2011   (22)   - 
Total Chemtura stockholders' equity   1,037    962 
           
Non-controlling interests   9    9 
Total stockholders' equity   1,046    971 
           
Total Liabilities and Stockholders' Equity  $2,855   $2,913 

 

See Accompanying Notes to Consolidated Financial Statements.

 

56
 

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2011, 2010 and 2009

 (In millions)

 

Increase (decrease) in cash  2011   2010   2009 
CASH FLOWS FROM OPERATING ACTIVITIES               
Net earnings (loss)  $120   $(585)  $(292)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:               
Gain on sale of business   (27)   (2)   - 
Loss on sale of discontinued operations   -    12    3 
Impairment charges   4    60    104 
Loss on early extinguishment of debt   -    88    - 
Depreciation and amortization   140    175    173 
Stock-based compensation expense   26    10    3 
Reorganization items, net   2    186    35 
Changes in estimates related to expected allowable claims   3    35    73 
Non-cash contractual post-petition interest expense   -    113    - 
Provision for doubtful accounts   7    3    5 
Equity income   (3)   (4)   - 
Deferred taxes   (6)   34    - 
Changes in assets and liabilities, net:               
Accounts receivable   13    (77)   36 
Impact of accounts receivable facilities   -    -    (103)
Inventories   (24)   (36)   85 
Restricted cash   -    (38)   - 
Other current assets   38    11    (4)
Other assets   3    (5)   (11)
Accounts payable   (11)   70    16 
Accrued expenses   (39)   36    (15)
Income taxes payable   5    (18)   (28)
Pension and post-retirement health care liabilities   (82)   (61)   (26)
Liabilities subject to compromise   (8)   (195)   (31)
Other liabilities   25    (10)   26 
Other   (4)   (6)   - 
Net cash provided by (used in) operating activities   182    (204)   49 
                
CASH FLOWS FROM INVESTING ACTIVITIES               
Net proceeds from divestments   8    43    3 
Payments for acquisitions, net of cash acquired   (35)   -    (5)
Capital expenditures   (154)   (124)   (56)
Net cash used in investing activities   (181)   (81)   (58)
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from Senior Notes   -    452    - 
Proceeds fromTerm Loan   -    292    - 
Proceeds from Amended DIP Credit Facility   -    299    - 
Payments on Amended DIP Credit Facility   -    (300)   - 
(Payments on) proceeds from DIP Credit Facility, net   -    (250)   250 
Repayments of 6.875% Notes due 2016   -    (75)   - 
Repayments of 6.875% Debentures due 2026   -    (19)   - 
Repayments of 7% Notes due 2009   -    (44)   - 
Payments on 2007 Credit Facility, net   -    (54)   (28)
Proceeds from long term borrowings   -    -    1 
Payments on long term borrowings   -    -    (18)
Proceeds from (payments on) other short term borrowings, net   3    -    (2)
Payments for debt issuance and refinancing costs   -    (40)   (30)
Payments for make-whole and no-call provisions   -    (10)   - 
Common shares acquired   (22)   -    - 
Proceeds from exercise of stock options   1    -    - 
Net cash (used in) provided by financing activities   (18)   251    173 
                
CASH AND CASH EQUIVALENTS               
Effect of exchange rates on cash and cash equivalents   (4)   (1)   4 
Change in cash and cash equivalents   (21)   (35)   168 
Cash and cash equivalents at beginning of year   201    236    68 
Cash and cash equivalents at end of year  $180   $201   $236 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2011, 2010 and 2009

 (In millions)

 

                       Accumulated             
   Common           Additional       Other       Non     
   Shares   Treasury   Common   Paid-in   Accumulated   Comprehensive   Treasury   Controlling     
   Issued   Shares   Stock   Capital   Deficit   Loss   Stock   Interests   Total 
Balance, January 1, 2009   254.1    11.5   $3   $3,036   $(2,189)  $(208)  $(167)  $13   $488 
Comprehensive loss:                                             
Net (loss) earnings                       (293)             1    (292)
Equity adjustment for translation of foreign currencies                            51              51 
Unrecognized pension and post-retirement plan costs, net of deferred tax expense of $1                            (78)             (78)
Changes in fair value of derivatives                            1              1 
Total comprehensive loss                                           (318)
Other                                      (1)   (1)
Stock-based compensation                  3                        3 
Other issuances   0.3                                       - 
Balance, December 31, 2009   254.4    11.5    3    3,039    (2,482)   (234)   (167)   13    172 
Comprehensive loss:                                             
Net (loss) earnings                       (586)             1    (585)
Equity adjustment for translation of foreign currencies                            (26)             (26)
Unrecognized pension and post-retirement plan costs, net of deferred tax expense of $4                            (16)             (16)
Total comprehensive loss                                           (627)
Cancellation of Chemtura previous common stock   (254.4)        (3)   3                        - 
Treasury stock cancellation        (11.5)        (167)             167         - 
Issuance of reorganized Chemtura common stock   95.5         1    1,423                        1,424 
Dividends attributable to the noncontrolling interest                                      (1)   (1)
Purchase of subsidiary shares from noncontrolling interest                                      (4)   (4)
Stock-based compensation                  7                        7 
Other issuances   0.1                                       - 
Balance, December 31, 2010   95.6    -    1    4,305    (3,068)   (276)   -    9    971 
Comprehensive income:                                             
Net earnings                       119              1    120 
Equity adjustment for translation of foreign currencies                            (35)             (35)
Unrecognized pension and post-retirement plan costs, net of deferred tax expense of $1 million                            (35)             (35)
Total comprehensive income                                           50 
Issuance of reorganized Chemtura common stock   2.4              19                        19 
Dividends attributable to the noncontrolling interest                                      (1)   (1)
Stock-based compensation                  29                        29 
Common shares aquired        2.0                        (22)        (22)
Other issuances   0.3                                       - 
Balance, December 31, 2011   98.3    2.0   $1   $4,353   $(2,949)  $(346)  $(22)  $9   $1,046 

 

See Accompanying Notes to Consolidated Financial Statements.

 

58
 

 

CHEMTURA CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

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 principal executive offices are located in Philadelphia, Pennsylvania and Middlebury, Connecticut. 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 the 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”).

 

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 (“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 were realized or incurred in the Chapter 11 cases were recorded in Reorganization items, net in our Consolidated Statements of Operations. In connection with our emergence from Chapter 11 on November 10, 2010, we recorded certain “plan effect” adjustments to our Consolidated Financial Statements as of the Effective Date in order to reflect certain expenses of our plan of reorganization (the “Plan”). See Note 18 – Emergence from Chapter 11 for a further discussion.

 

59
 

 

Accounting Policies

 

Revenue Recognition

 

Substantially all of our revenues are derived from the sale of products. Revenue is recognized when risk of loss and title to the product is transferred to the customer. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with the collected taxes recorded as current liabilities until remitted to the respective governmental authorities. Our products are sold subject to various shipping terms. Our terms of delivery are included on our sales invoices and order confirmation documents.

 

Customer Rebates

 

We accrue for the estimated cost of customer rebates as a reduction of sales. Customer rebates are primarily based on customers achieving defined sales targets over a specified period of time. We estimate the cost of these rebates based on the likelihood of the rebate being achieved and recognize the cost as a deduction from sales when such sales are recognized. Rebate programs are monitored on a regular basis and adjusted as required. Our accruals for customer rebates were $20 million at December 31, 2011 and 2010, respectively. Customer rebates are included as a reduction to accounts receivable on our Consolidated Balance Sheet.

 

Operating Costs and Expenses

 

Cost of goods sold (“COGS”) includes all costs incurred in manufacturing goods, including raw materials, direct manufacturing costs and manufacturing overhead. COGS also includes warehousing, distribution, engineering, purchasing, customer service, environmental, health and safety functions, and shipping and handling costs for outbound product shipments. Selling, general and administrative (“SG&A”) expenses include costs and expenses related to the following functions and activities: selling, advertising, legal, provision for doubtful accounts, corporate facilities and corporate administration. SG&A also includes accounting, information technology, finance and human resources, excluding direct support in manufacturing operations, which is included as COGS. Research and development (“R&D”) expenses include basic and applied research and development activities of a technical and non-routine nature. R&D costs are expensed as incurred. COGS, SG&A and R&D expenses exclude depreciation and amortization expenses which are presented on a separate line in our Consolidated Statements of Operations.

 

Other Expense, Net

 

Other expense, net includes costs associated with our accounts receivable facilities, foreign exchange losses, interest income and other items.

 

(In millions)  2011   2010   2009 
             
Costs of accounts receivable facilities  $-   $-   $(2)
Foreign exchange loss   (2)   (11)   (22)
Interest income   4    3    7 
Other items, individually less than $1 million   (2)   2    - 
                
   $-   $(6)  $(17)

 

Allowance for Doubtful Accounts

 

Included in accounts receivable are allowances for doubtful accounts in the amount of $20 million in 2011 and $24 million in 2010. The allowance for doubtful accounts reflects a reserve representing our estimate of the amounts that may not be collectible. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserves, including historical data, experience, customer types, credit worthiness, and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collection.

 

Inventory Valuation

 

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method.

 

60
 

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation expense from continuing operations is computed on the straight-line method using the following ranges of asset lives: land improvements - 3 to 20 years; buildings and improvements - 2 to 40 years; machinery and equipment - 2 to 25 years; information systems and equipment - 2 to 10 years; and furniture, fixtures and other - 1 to 10 years. See Note 6 – Property, Plant and Equipment for further information.

 

Renewals and improvements that significantly extend the useful lives of the assets are capitalized. Capitalized leased assets and leasehold improvements are depreciated over the shorter of their useful lives or the remaining lease term. Expenditures for maintenance and repairs are charged to expense as incurred.

 

Intangible Assets

 

Patents, trademarks and other intangibles assets are being amortized principally on a straight-line basis using the following ranges for their estimated useful lives: patents - 5 to 20 years; trademarks - 7 to 40 years; customer relationships - 14 to 30 years; production rights - 9 to 10 years; and other intangibles - 5 to 20 years. See Note 7 – Goodwill and Intangible Assets for further information.

 

Recoverability of Long-Lived Assets and Goodwill

 

We evaluate the recoverability of the carrying value of long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under such circumstances, we assess whether the projected undiscounted cash flows of our long-lived assets are sufficient to recover the existing unamortized cost of our long-lived assets. If the undiscounted projected cash flows are not sufficient, we calculate the impairment amount by discounting the projected cash flows using our weighted-average cost of capital. The amount of the impairment is written off against earnings in the period in which the impairment is determined.

 

We evaluate the recoverability of the carrying value of goodwill on an annual basis as of July 31, or when events occur or circumstances change. See Note 7 - Goodwill and Intangible Assets for further details.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred tax assets is recognized in income in the period that includes the enactment date.

 

We recognize the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We accrue for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated.

 

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be indefinitely reinvested. 

 

Environmental Liabilities

 

Each quarter we evaluate and review our estimates for future remediation, operation and management costs directly related to environmental remediation, 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 to implement the remediation plan will occur. At sites where we expect to incur ongoing operations and maintenance expenditures, we accrue on an undiscounted basis, for a period of generally 10 years, those costs which are probable and reasonably estimable. Environmental liabilities related to claims as part of the Chapter 11 cases are reflected in our Consolidated Balance Sheet at December 31, 2010 at amounts expected to be allowed by the Bankruptcy Court. These amounts were settled during 2011.

 

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Litigation and Contingencies

 

In accordance with guidance now codified under ASC Topic 450, Contingencies, we record in our Consolidated Financial Statements amounts representing our probable and reasonably estimable liability for claims, litigation and guarantees. As information about current or future litigation or other contingencies becomes available, management assesses whether such information warrants the recording of additional expenses relating to those contingencies. See Note 19 - Legal Proceedings and Contingencies for further information.

 

Stock-Based Compensation

 

We recognize compensation expense for stock-based awards issued over the requisite service period for each separately vesting tranche, as if multiple awards were granted. Stock-based compensation expense is measured at the date of grant, based on the fair value of the award. Stock-based compensation expense recognized was $26 million, $10 million, and $3 million for the years ended December 31, 2011, 2010 and 2009, respectively.

 

Translation of Foreign Currencies

 

Balance sheet accounts denominated in foreign currencies are translated at the current rate of exchange as of the balance sheet date, while revenues and expenses are translated at average rates of exchange during the periods presented. The cumulative foreign currency adjustments resulting from such translation are included in accumulated other comprehensive income loss.

 

Cash Flows

 

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 both December 31, 2011 and 2010 is $1 million 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 within current assets at December 31, 2011 is $5 million of cash on deposit for the settlement of disputed bankruptcy claims that existed on the Effective Date. At December 31, 2010, $32 million and $6 million of restricted cash related to the disputed bankruptcy claims was included within current assets and non-current assets, respectively.

 

In 2011 and 2010 we settled approximately $41 million and $373 million of liabilities subject to compromise, respectively, in cash upon our emergence from Chapter 11. Of the $41 million paid in 2011, $33 million was paid from restricted cash. Additionally, in 2011 and 2010 we issued approximately $33 million and $1.4 billion of common stock for the settlement of liabilities subject to compromise, respectively, in accordance with the Plan.

 

Cash payments included interest payments of $57 million in 2011, $56 million in 2010 (which includes $24 million of interest payments in accordance with the Plan) and $45 million in 2009. Cash payments also included income tax payments, net of refunds of $16 million in 2011, $6 million in 2010 and $33 million in 2009.

 

Accounting Developments

 

Recently Implemented

 

In May 2009, the Financial Accounting Standards Board (the “FASB”) issued guidance now codified as ASC Topic 855, Subsequent Events (“ASC 855”), which provides authoritative accounting literature related to evaluating subsequent events. ASC 855 is similar to the current guidance with some exceptions that are not intended to result in significant change to current practice. On February 24, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09, Amendments to Certain Recognition and Disclosure Requirements (“ASC 2010-09”), which amends ASC 855. ASU 2010-09 addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent event procedures. ASU 2010-09 was effective immediately. We adopted ASU 2010-09 in our Quarterly Report for the quarter ended March 31, 2010 and as a result of the adoption we no longer are required to disclose the date through which subsequent events have been evaluated.

 

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In June 2009, FASB issued guidance now codified as ASC Topic 105, Generally Accepted Accounting Principles (“ASC 105”). ASC 105 establishes only two levels of GAAP, authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) is the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The standard was effective for financial statements for interim or annual reporting periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our results of operations, financial condition or disclosures. References made to FASB guidance throughout this document have been updated for the Codification.

 

In June 2009, the FASB issued guidance now codified as ASC Topic 810, Consolidation (“ASC 810”), which amends certain guidance for determining whether an entity is a variable interest entity (“VIE”). ASC 810 requires an enterprise to perform an analysis to determine whether its variable interests give it a controlling financial interest in a VIE. Companies are required to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance. In addition, ASC 810 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. The standard was effective for financial statements for interim or annual reporting periods that began after November 15, 2009. Earlier application was prohibited. We adopted the provisions of ASC 810 effective as of January 1, 2010 and its adoption did not have a material impact on our results of operations, financial condition or disclosures.

 

On January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements (“ASU 2010-06”), which amends ASC 820 Fair Value Measurements and Disclosures (“ASC820”). ASU 2010-06 adds new requirements for disclosures about transfers into and out of fair value hierarchy Levels 1 and 2, as defined in ASC 820, and separate disclosures about purchases, sales, issuances, and settlements relating to fair value hierarchy Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 amends guidance on employers’ disclosures about postretirement benefit plan assets under ASC 715 Compensation-Retirement Benefits to require that disclosures be provided by classes of assets instead of by major categories of assets. ASU 2010-06 was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the fair value hierarchy Level 3 activity mentioned above. We adopted the provisions effective as of January 1, 2011. The adoption of this guidance did not have a material impact on our results of operations, financial condition because it provides enhanced disclosure requirements only.

 

In May 2011, the 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 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 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. We are currently evaluating the impact this accounting standard update will have 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. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The provisions of ASU 2011-05 are effective for the first reporting period (including interim periods) beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220). This update defers the effective date for items only relating to the presentation and reclassification adjustments in ASU 2011-05. The adoption of these standards will not have a material financial statement impact as it only impacts the presentation of our financial statements.

 

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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 amendments in 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 will 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 is meant to assists users of financial statements 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 amendments in ASU 2011-09 are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. We will adopt the provisions of ASU 2011-09 beginning with our interim period ended March 31, 2012. The adoption of this guidance is not expected to have a material impact on our results of operations or financial condition.

 

Risks and Uncertainties

 

Our revenues are largely dependent on the continued operation of our manufacturing facilities. There are many risks involved in operating chemical manufacturing plants, including the breakdown, failure or substandard performance of equipment, operating errors, natural disasters, the need to comply with directives of, and maintain all necessary permits from, government agencies as well as potential terrorist attacks. Our operations can be adversely affected by raw material shortages, labor force shortages or work stoppages and events impeding or increasing the cost of transporting our raw materials and finished products. The occurrence of material operational problems, including but not limited to the events described above, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility. With respect to certain facilities, such events could have a material effect on Chemtura as a whole.

 

Our operations are also subject to various hazards incident to the production of industrial chemicals. These include the use, handling, processing, storage and transportation of certain hazardous materials. Under certain circumstances, these hazards could cause personal injury and loss of life, severe damage to and destruction of property and equipment, environmental damage and suspension of operations. Claims arising from any future catastrophic occurrence at any one of our facilities may result in us being named as a defendant in lawsuits asserting potential claims.

 

We perform ongoing credit evaluations of our customers’ financial condition including an assessment of the impact, if any, of prevailing economic conditions. We generally do not require collateral from our customers. We are exposed to credit losses in the event of nonperformance by counterparties on derivative instruments when utilized. The counterparties to these transactions are major financial institutions, which may be adversely affected by global economic impacts. However, we consider the risk of default to be minimal.

 

International operations are subject to various risks which may or may not be present in U.S. operations. These risks include political instability, the possibility of expropriation, restrictions on dividends and remittances, instabilities of currencies, requirements for governmental approvals for new ventures and local participation in operations such as local equity ownership and workers' councils. Currency fluctuations between the U.S. dollar and the currencies in which we conduct business have caused and will continue to cause foreign currency transaction gains and losses, which may be material. Any of these events could have an adverse effect on our international operations.

 

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2)ACQUISITIONS AND DIVESTITURES

 

Acquisitions

 

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.

 

On February 1, 2011, we announced the formation of DayStar Materials, LLC (“Daystar”), 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 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.

 

Divestitures

 

Tetrabrom Joint Venture Divestiture

 

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. The first payment is due in April 2012. A pre-tax gain of $27 million was recorded on the sale.

 

Sodium Sulfonates Divestiture

 

On July 30, 2010, we completed the sale of our natural sodium sulfonates and oxidized petrolatum product lines to Sonneborn Holding, LLC for net proceeds of $5 million. The sale included certain assets, our 50% interest in a European joint venture, the assumption of certain liabilities and the mutual release of obligations between the parties. The net assets sold consisted of accounts receivable of $3 million, other current assets of $7 million, property, plant and equipment, net of $2 million, environmental liabilities of $3 million and other liabilities of $6 million. A pre-tax gain of approximately $2 million was recorded on the sale.

 

PVC Additives Divestiture

 

On April 30, 2010, we completed the sale of our PVC additives business to Galata Chemicals LLC (formerly known as Artek Aterian Holding Company, LLC) and its sponsors, Aterian Investment Partners Distressed Opportunities, LP and Artek Surfin Chemicals Ltd. (collectively, “Galata”) for net proceeds of $38 million which included a working capital adjustment that was received during the fourth quarter of 2010. The net assets sold consisted of accounts receivable of $47 million, inventory of $42 million, other current assets of $6 million, other assets of $1 million, pension and other post-retirement health care liabilities of $25 million, accounts payable of $3 million and other accrued liabilities of $1 million. A pre-tax loss of approximately $13 million was recorded on the sale after the elimination of $16 million of accumulated other comprehensive loss (“AOCL”) resulting from the liquidation of a foreign subsidiary as part of the transaction.

 

We classified the PVC additives business as discontinued operations in our Consolidated Statements of Operations for all periods presented.  We determined the cash flows associated with the continuation of activities are deemed indirect and we evaluated whether we had significant continued involvement in the operations of the disposed businesses. Accordingly, we did not deem our involvement with the disposed business subsequent to the sale to be significant. All applicable disclosures included in the accompanying footnotes have been updated to reflect the PVC additives business as a discontinued operation.

 

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Loss from discontinued operations for periods with activities consists of the following:

 

   Year Ended 
(In millions)  2010   2009 
         
Net Sales  $96   $241 
           
Pre-tax loss from discontinued operations  $(1)  $(69)(a)
Income tax benefit   -    6 
Loss from discontinued operations  $(1)  $(63)

 

(a)In 2009, we recorded a pre-tax impairment charge of $65 million to write-down the value of property, plant and equipment, net and intangible assets, net (see Note 3 – Restructuring and Asset Impairment Activities for further information).

 

OrganoSilicones Divestiture

 

On July 31, 2003, we sold certain assets and assigned certain liabilities of our OrganoSilicones business unit to the Specialty Materials division of General Electric Company (“GE”) and acquired GE’s Specialty Chemicals business.

 

During 2009, we recorded an accrual of $4 million ($3 million, net of taxes) which was included in loss on sale of discontinued operations, net of tax in our Consolidated Statements of Operations, related to the divestiture of our OrganoSilicones business. This accrual related to a loss contingency for information that became available during 2009.

 

3)RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES

 

Reorganization Initiatives

 

In 2009, the Bankruptcy Court approved the implementation of certain cost savings and growth initiatives, including the closure of a manufacturing facility in Ashley, IN, the consolidation of warehouses related to our Consumer Products segment, the reduction of leased space at two of our U.S. office facilities, and the rejection of various unfavorable contracts. Additionally, on January 25, 2010, our Board of Directors (the “Board”) approved an initiative involving the consolidation and idling of certain assets within the Great Lakes Solutions business operations in El Dorado, Arkansas, which was approved by the Bankruptcy Court on February 23, 2010 and was expected to be substantially completed by the first half of 2012. During 2010, the demand for brominated products used in electronic applications grew significantly. With the evidence that demand has started to recover for our products used in oil and gas applications in the Gulf of Mexico as well as insulation and furniture foam applications, and recognizing the emerging demand for mercury removal applications, it has become evident that we will need to produce larger quantities of bromine than were projected when we formulated our consolidation plan. In addition, in the first quarter of 2011 our partner informed us that they will exercise their right to purchase our interest in our Tetrabrom joint venture in the Middle East that supplies a brominated flame retardant to us. While under the terms of the joint venture agreement, the purchaser is obligated to continue to supply the current volumes of the brominated flame retardant to us for two years following the acquisition, we need to plan for the ultimate production of this product. The sale of our 50% interest in Tetrabrom Technologies Ltd. was completed in November 2011, with proceeds to be received over a three year period beginning in April 2012, which will assist in defraying the cost of any required capacity addition that we may be required to make. Our analysis has indicated that the most cost effective source of the additional bromine we require is to continue to operate many of the bromine assets we had planned to idle and to invest to improve their operating efficiency. In light of this analysis, on April 20, 2011, our Board confirmed that we should defer a portion of the El Dorado restructuring plan and continue to operate certain of the bromine and brine assets that were planned to be idled.

 

As a result of our reorganization initiatives, we recorded pre-tax charges of $3 million for the year ended December 31, 2011 primarily for asset impairments and accelerated depreciation. We recorded pre-tax charges of $37 million for the year ended December 31, 2010 ($5 million was recorded to reorganization items, net for severance, asset relocation costs and contract termination costs, $30 million was recorded to depreciation and amortization for accelerated depreciation, and $2 million was recorded to COGS for accelerated asset retirement obligations and asset write-offs). In 2009, we recorded pre-tax charges of $9 million ($4 million was recorded to reorganization items, net for severance and real property lease rejections, $3 million was recorded to depreciation and amortization expense for accelerated depreciation, $1 million was recorded to COGS and $1 million was recorded to SG&A for asset disposals and accelerated asset retirement obligations).

 

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Corporate Restructuring Programs

 

In November 2011, we approved a restructuring plan intended to make Chemtura AgroSolutions more cost efficient by centralizing certain functions regionally and consolidating laboratory activities in North America. As a result of this plan, we recorded a pre-tax charge of $3 million for severance to facility closures, severance and related costs for the year ended December 31, 2011

 

In March 2010, we approved a restructuring plan to consolidate certain corporate functions internationally to gain efficiencies and reduce costs. As a result of this plan, we recorded a pre-tax charge of $1 million for severance to facility closures, severance and related costs for the year ended December 31, 2010.

 

In December, 2008, we announced a worldwide restructuring program to reduce cash fixed costs. This initiative involved a worldwide reduction in our professional and administrative staff by approximately 500 people. We recorded a pre-tax charge of $3 million for the year ended December 31, 2009 to facility closures, severance and related costs for severance and related costs.

 

A summary of the charges and adjustments related to these restructuring programs is as follows:

 

   Severance   Other     
   and   Facility     
   Related   Closure     
(In millions)  Costs   Costs   Total 
Balance at January 1, 2009  $29    2    31 
Facility closure, severance and related costs   2    1    3 
Reorganization initiatives, net   1    3    4 
Cash payments   (23)   (2)   (25)
Balance at December 31, 2009   9    4    13 
Facility closure, severance and related costs   1    -    1 
Cash payments   (9)   (4)   (13)
Balance at December 31, 2010   1    -    1 
Facility closure, severance and related costs   3    -    3 
Cash payments   (3)   -    (3)
Balance at December 31, 2011  $1    -  $1 

 

At December 31, 2011 and 2010, the balance of these reserves were included in accrued expenses in our Consolidated Balance Sheet.

 

Asset Impairments

 

In accordance with ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”) and ASC Topic 360, Property, Plant and Equipment (“ASC 360”), we recorded pre-tax charges totaling $4 million, $60 million and $104 million in 2011, 2010 and 2009, respectively, to impairment charges or loss from discontinued operations in our Consolidated Statements of Operations.

 

For the year ended December 31, 2011, we recorded an impairment charge of $3 million related to intangible assets of the Chemtura AgroSolutions reporting unit with no future use. Additionally, there was a $1 million impairment charge related to property, plant and equipment of the El Dorado, Arkansas facility reorganization initiative.

 

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During the fourth quarter of 2010, we recorded an impairment charge of $57 million to reduce the carrying value of goodwill in our Chemtura AgroSolutions segment. During the annual impairment review as of July 31, 2010, we identified risks inherent in our Chemtura AgroSolutions reporting unit’s forecast given its recent performance was below expectations. At the end of the fourth quarter of 2010, this reporting unit’s performance had significantly fallen below expectations for several consecutive quarters. We concluded that it was appropriate to perform a goodwill impairment review as of December 31, 2010. We used revised forecasts to compute the estimated fair value of this reporting unit. These projections indicated that the estimated fair value of the Chemtura AgroSolutions reporting unit was less than the carrying value. Based upon our preliminary step 2 analysis, an estimated goodwill impairment charge of $57 million was recorded (representing the remaining goodwill of this reporting unit). Due to the complexities of the analysis, which involves an allocation of the fair value, we finalized our step 2 analysis and goodwill impairment charge in the first quarter of 2011. The analysis supported our 2010 conclusion that the goodwill was fully impaired.

 

During the first half of 2010, we recorded an impairment charge of $3 million, which was included in loss from discontinued operations, net of tax in our Consolidated Statements of Operations, primarily related to further reducing the carrying value of property, plant and equipment of our PVC additives business, formerly a component of the Industrial Engineered Products reporting segment, to reflect the revised estimated fair value of the assets. The decrease in fair value is the result of the definitive agreement entered into with counterparties in December 2009 for the sale of our PVC additives business.

 

In the fourth quarter of 2009, we recorded an impairment charge of $7 million, of which $5 million was included in loss from discontinued operations, net of tax in our Consolidated Statements of Operations, primarily related to further reducing the carrying value of property, plant and equipment of our PVC additives business to reflect the revised estimated fair value of the assets.

 

In the second quarter of 2009, we experienced continued year-over-year revenue reductions from the impact of the global recession in the electronic, building and construction industries. In addition, the Consumer Products segment revenues were impacted by cooler and wetter than normal weather in the northeastern and mid-western regions of the United States. Based on these factors, we reviewed the recoverability of the long-lived assets for the asset groupings within our segments.

 

For the PVC additives business, formerly a component of our Industrial Engineered Products reporting segment, the carrying value of the long-lived assets was in excess of the undiscounted cash flows. As a result, we recorded a pre-tax impairment charge of $60 million in the second quarter of 2009 to write-down the value of property, plant and equipment, net by $48 million and intangible assets, net by $12 million. The $60 million charge was included in loss from discontinued operations, net of tax in our Consolidated Statements of Operations.

 

Due to the factors cited above, we also concluded it was appropriate to perform a goodwill impairment review as of June 30, 2009. We used the updated projections in our long-range plan to compute estimated fair values of our reporting units. These projections indicated that the estimated fair value of our Consumer Products reporting unit was less than its carrying value. Based on our preliminary analysis, an estimated goodwill impairment charge of $37 million was recorded for this reporting unit in the second quarter of 2009 (representing the remaining goodwill in this reporting unit). We finalized our analysis of the goodwill impairment charge in the third quarter of 2009 and no change to the estimated charge was required (see Note 7 – Goodwill and Intangible Assets for further information).

 

4)SALE OF ACCOUNTS RECEIVABLE

 

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. We had no outstanding borrowings under the A/R Financing Facility for the period ending December 31, 2011.

 

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We retain servicing rights and a retained interest in the financed receivables. We will classify the outstanding trade receivables financing as a secured borrowings in our Consolidated Balance Sheet.

 

The agreement governing our A/R Financing Facility does not contain any financial covenants but does contain customary events of default including certain receivable performance metrics. Any material failure to meet the applicable A/R Financing facility metrics in the future could lead to an early termination event under the A/R Financing Facility, which could require us to cease our use of such facilities, prohibiting us from obtaining additional borrowings against our receivables or, at the discretion of the Purchaser, requiring that we repay the A/R Financing Facility in full.

 

On January 23, 2009, we entered into a U.S. accounts receivable facility with up to $150 million of capacity and a three-year term with certain lenders. Under the U.S. facility, certain of our subsidiaries were able to sell their accounts receivable to a special purpose entity (“SPE”) that was created for the purpose of acquiring such receivables and selling an undivided interest therein to certain purchasers. In accordance with the receivables purchase agreements, the purchasers were granted an undivided ownership interest in the accounts receivable owned by the SPE. The facility was terminated on March 23, 2009 as a condition of the Chapter 11 proceedings. All accounts receivable were sold back by the purchasers and the SPE to their original selling entity using proceeds of $117 million from a credit facility extended to us during Chapter 11.

 

At January 1, 2009, certain of our European subsidiaries maintained a separate European Facility to sell up to approximately $244 million (€175 million) of the eligible accounts receivable directly to a purchaser as of December 31, 2008. At January 1, 2009, $67 million of international accounts receivable had been sold under this facility. During the second quarter of 2009, with no agreement to restart the European Facility, the remaining balance of the accounts receivable previously sold under this facility was settled and the facility was terminated.

 

In 2009, the costs associated with the U.S. and European facilities of $2 million is included in other expense, net in our Consolidated Statements of Operations. Additionally, following the termination of the U.S. facilities in 2009, deferred financing costs of approximately $4 million related to this facility were charged to reorganization items, net in our Consolidated Statements of Operations.

 

5)INVENTORIES

 

(In millions)  2011   2010 
Finished goods  $348   $325 
Work in process   43    41 
Raw materials and supplies   151    162 
   $542   $528 

 

Included in the above net inventory balances are inventory obsolescence reserves of approximately $18 million and $23 million at December 31, 2011 and 2010, respectively.

 

6)PROPERTY, PLANT AND EQUIPMENT

 

(In millions)  2011   2010 
Land and improvements  $85   $79 
Buildings and improvements   240    231 
Machinery and equipment   1,238    1,174 
Information systems and equipment   175    173 
Furniture, fixtures and other   31    32 
Construction in progress   121    97 
    1,890    1,786 
Less: accumulated depreciation   1,138    1,070 
   $752   $716 

 

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Depreciation expense from continuing operations amounted to $102 million, $138 million and $124 million for 2011, 2010 and 2009, respectively. Depreciation expense from continuing operations includes accelerated depreciation of certain fixed assets associated with our restructuring programs of $2 million, $30 million and $5 million for 2011, 2010 and 2009, respectively.

 

7)GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Goodwill by reportable segment is as follows:

 

   Industrial         
   Performance   Chemtura     
(In millions)  Products   AgroSolutions   Total 
                
Goodwill at December 31, 2009  $268   $57   $325 
Accumulated impairments at December 31, 2009   (90)   -    (90)
Net Goodwill at December 31, 2009   178    57    235 
                
Impairment charges   -    (57)   (57)
Foreign currency translation   (3)   -    (3)
                
Goodwill at December 31, 2010   265    -    265 
Accumulated impairments at December 31, 2010   (90)   -    (90)
Net Goodwill at December 31, 2010   175    -    175 
                
Foreign currency translation   (1)   -    (1)
                
Goodwill at December 31, 2011   264    -    264 
Accumulated impairments at December 31, 2011   (90)   -    (90)
Net Goodwill at December 31, 2011  $174   $-   $174 

 

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 the 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 16 – 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 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.

 

We concluded that no goodwill impairment existed in any of our reporting units based on the annual reviews as of July 31, 2011 and 2010. However during the annual review as of July 31, 2010, we identified risks inherent in Chemtura AgroSolutions reporting unit’s forecast given the recent performance of this reporting unit which was below expectations. At the end of the fourth quarter of 2010, this reporting unit’s performance had significantly fallen below expectations for several consecutive quarters. We concluded that it was appropriate to perform a goodwill impairment review as of December 31, 2010. We used revised forecasts to compute the estimated fair value of this reporting unit. These projections indicated that the estimated fair value of the Chemtura AgroSolutions reporting unit was less than the carrying value. Based upon our preliminary step 2 analysis, an estimated goodwill impairment charge of $57 million was recorded, representing the remaining goodwill of this reporting unit. Due to the complexities of the analysis, which involved an allocation of the fair value, we finalized our step 2 analysis and goodwill impairment charge in the first quarter of 2011. The analysis supported our 2010 conclusion that the goodwill was fully impaired.

 

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In connection with the continued weakness in global financial markets and our filing for relief under Chapter 11, we concluded it was appropriate to perform a goodwill impairment review as of March 31, 2009. We used our own estimates of the effects of the macroeconomic changes on the markets we serve to develop an updated view of our projections. Those updated projections were used to compute updated estimated fair values of our reporting units. Based on these estimated fair values used to test goodwill for impairment, we concluded that no impairment existed in any of our reporting units at March 31, 2009.

 

Subsequently in June 2009, we performed another goodwill impairment review as certain of our reporting unit were negatively impacted versus expectations due to the cold and wet weather conditions during the first half of 2009. We used the updated projections in our long-range plan to compute estimated fair values of our reporting units. These projections indicated that the estimated fair value of our Consumer Products reporting unit was less than the carrying value. Based on our analysis, a goodwill impairment charge of $37 million was recorded for this reporting unit in the second quarter of 2009, which represented the remaining goodwill in this reporting unit.

 

Intangible Assets

 

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

 

   2011   2010 
(In millions)  Gross
Value
   Accumulated
Amortization
   Net
Intangibles
   Gross
Value
   Accumulated
Amortization
   Net
Intangibles
 
Patents  $128   $(70)  $58   $127   $(62)  $65 
Trademarks   262    (71)   191    264    (62)   202 
Customer relationships   146    (50)   96    147    (43)   104 
Production rights   46    (28)   18    46    (24)   22 
Other   70    (41)   29    73    (37)   36 
Total  $652   $(260)  $392   $657   $(228)  $429 

 

The decrease in gross intangible assets since December 31, 2010 is due to foreign currency translation of $4 million, the write-off of $4 million related to fully amortized intangibles (offset within accumulated amortization) and impairments of $3 million, partially offset by the capitalization of re-registration costs of $6 million.

 

Amortization expense from continuing operations related to intangible assets amounted to $38 million in 2011, $37 million in 2010 and $38 million in 2009. Estimated amortization expense of intangible assets for the next five fiscal years is as follows: $35 million (2012), $35 million (2013), $29 million (2014) $25 million (2015) and $18 million (2016).

 

8)DEBT

 

Our debt is comprised of the following:

 

(In millions)  2011   2010 
         
7.875% Senior Notes due 2018, net of unamortized discount of $3 million in 2011 and 2010 with an effective interest rate of 8.17% in 2011 and 8.15% in 2010  $452   $452 
Term Loan due 2016, net of unamortized discount of $2 million in 2011 and $3 million in 2010 with an effective interest rate of 5.79% in 2011 and 5.77% in 2010   293    292 
Other borrowings   8    7 
Total Debt   753    751 
           
Less: Short-term borrowings   (5)   (3)
           
Total Long-Term Debt  $748   $748 

 

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Financing Facilities

 

In 2010, in order to fund our Chapter 11 Plan and provide for future capital needs, we obtained approximately $1 billion in financing. On August 27, 2010, we completed a private placement offering under Securities and Exchange Commission (“SEC”) 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 the Effective Date, we entered into a five year senior secured revolving credit facility available through 2015 (the “ABL Facility”) with Bank of America, N.A., as administrative agent and the other lenders party thereto 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.

 

Senior Notes

 

At any time prior to September 1, 2014, we may redeem some or all of the Senior Notes at a redemption price equal to 100% of the principal amount thereof plus a make-whole premium (as defined in the indenture) and accrued and unpaid interest up to, but excluding, the redemption date. We may also redeem some or all of the Senior Notes at any time on or after September 1, 2014, with the redemption prices being, prior to September 1, 2015, 103.938% of the principal amount, on or after September 1, 2015 and prior to September 1, 2016, 101.969% of the principal amount and thereafter 100% plus any accrued and unpaid interest to the redemption date. In addition, prior to September 1, 2013, we may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings. If we experience specific kinds of changes in control, we may be required to offer to repurchase all of the Senior Notes. The redemption price (subject to limitations as described in the indenture) is equal to accrued and unpaid interest on the date of redemption plus the redemption price as set forth above.

 

Our Senior Notes contain covenants that limit our ability to enter into certain transactions, such as incurring additional indebtedness, creating liens, paying dividends, and entering into dispositions and joint ventures. As of December 31, 2011, we were in compliance with the covenant requirements of the Senior Notes.

 

Our Senior Notes are subject to certain events of default, including, among others, breach of other agreements in the Indenture; any guarantee of a significant subsidiary ceasing to be in full force and effect; a default by us or our restricted subsidiaries under any bonds, debentures, notes or other evidences of indebtedness of a certain amount, resulting in its acceleration; the rendering of judgments to pay certain amounts of money against us or our significant subsidiaries which remains outstanding for 60 days; and certain events of bankruptcy or insolvency.

 

In connection with the Senior Notes, in June 2011, we consummated an exchange offer, registered with the SEC, to exchange unregistered Senior Notes originally issued in the private placement offering for registered Senior Notes. The terms of the registered Senior Notes are substantially identical to the unregistered Senior Notes, except that transfer restrictions, registration rights and additional interest provisions relating to the unregistered Senior Notes do not apply to the registered Senior Notes.

 

Term Loan

 

Borrowings under the Term Loan (due in 2016) bear interest at a rate per annum equal to, at our election, (i) 3.0% plus the Base Rate (defined as the higher of (a) the Federal Funds rate plus 0.5%; (b) Bank of America’s published prime rate; and (c) the Eurodollar Rate plus 1%) or (ii) 4.0% plus the Eurodollar Rate (defined as the higher of (a) 1.5% and (b) the current LIBOR adjusted for reserve requirements).

 

The Term Loan is secured by a first priority lien on substantially all of our U.S. tangible and intangible assets (excluding accounts receivable, inventory, deposit accounts and certain other related assets), including, without limitation, real property, equipment and intellectual property, together with a pledge of the equity interests of our first tier subsidiaries and the guarantors of the Term Loan, and a second priority lien on substantially all of our U.S. accounts receivable and inventory.

 

We may, at our option, prepay the outstanding aggregate principal amount on the Term Loan advances in whole or ratably in part along with accrued and unpaid interest on the date of the prepayment.

 

Our obligations as borrower under the Term Loan are guaranteed by certain of our U.S. subsidiaries.

 

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The Term Loan contains 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.

 

Additionally, the Term Loan requires that we meet certain 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. As of December 31, 2011, we were in compliance with the covenant requirements of the Term Loan.

 

The Term Loan is subject to certain events of default, applicable to Chemtura, the guarantors and their respective subsidiaries, including, nonpayment of principal, interest, fees or other amounts, violation of covenants, material inaccuracy of representations and warranties (including the existence of a material adverse event as defined in the agreement), cross-default to material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, a change in control, and actual or asserted invalidity of liens or guarantees or any collateral document, in certain cases subject to the threshold amounts and grace periods set forth in the Term Loan agreement.

 

On September 27, 2010, we entered into Amendment No. 1 to the Term Loan which deleted the requirement that intercompany loans be subordinated, as the requirement was inconsistent with the provisions for prepayment of other debt which expressly permitted prepayments of intra-group debt. The amendment also clarified, among other things, language permitting payments and dispositions made pursuant to the Plan.

 

ABL Facility

 

The revolving loans under the ABL Facility (available through 2015) will bear interest at a rate per annum which, at our option, can be either: (a) a base rate (the highest of (i) Bank of America, N.A.’s “prime rate,” (ii) the Federal Funds Effective Rate plus 0.5% and (iii) the one-month LIBOR plus 1.00%) plus a margin of between 2.25% and 1.75% based on the average excess availability under the ABL Facility for the preceding quarter; or (b) the current reserve adjusted LIBOR plus a margin of between 3.25% and 2.75% based on the average excess availability under the ABL Facility for the preceding quarter.

 

Our obligations (and the obligations of the other borrowing subsidiaries) under the ABL Facility are guaranteed on a secured basis by all the guarantors (as defined in the agreement) that are not borrowers, and by certain of our future direct and indirect domestic subsidiaries. The obligations and guarantees under the ABL Facility will be secured by (i) a first-priority security interest in the borrowers’ and the guarantors’ existing and future inventory and accounts receivable, together with general intangibles relating to inventory and accounts receivable, contract rights under agreements relating to inventory and accounts receivable, documents relating to inventory, supporting obligations and letter-of-credit rights relating to inventory and accounts receivable, instruments evidencing payment for inventory and accounts receivable; money, cash, cash equivalents, securities and other property held by the Administrative Agent or any lender under the ABL Facility; deposit accounts, credits and balances with any financial institution with which any borrower or any guarantor maintains deposits and which contain proceeds of, or collections on, inventory and accounts receivable; books, records and other property related to or referring to any of the foregoing and proceeds of any of the foregoing (the “Senior Asset Based Priority Collateral”); and (ii) a second-priority security interest in substantially all of the borrowers’ and the guarantors’ other assets, including (a) 100% of the capital stock of borrowers’ and the guarantors’ direct domestic subsidiaries held by the borrowers and the guarantors and 100% of the non-voting capital stock of the borrowers’ and the guarantors’ direct foreign subsidiaries held by the borrowers and the guarantors, and (b) 65% of the voting capital stock of the borrowers’ and the guarantors’ direct foreign subsidiaries (to the extent held by the borrowers and the guarantors), in each case subject to certain exceptions set forth in the ABL Facility agreement and the related loan documentation.

 

Mandatory prepayments of the loans under the ABL Facility (and cash collateralization of outstanding letters of credit) are required (i) to the extent the usage of the ABL Facility exceeds the lesser of (a) the borrowing base and (b) the then effective commitments and (ii) subject to exceptions, thresholds and reinvestment rights, with the proceeds of certain sales or casualty events of assets on which the ABL Facility has a first priority security interest.

 

If, at the end of any business day, the amount of unrestricted cash and cash equivalents held by the borrowers and guarantors (excluding amounts in certain exempt accounts) exceeds $20 million in the aggregate, mandatory prepayments of the loans under the ABL Facility (and cash collateralization of outstanding letters of credit) are required on the following business day in an amount necessary to eliminate such excess (net of our known cash uses on the date of such prepayment and for the 2 business days thereafter).

 

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The ABL Facility agreement contains certain affirmative and negative covenants (applicable to us, the other borrowing subsidiaries, the guarantors and their respective subsidiaries), including, without limitation, covenants requiring financial reporting and notices of certain events, and covenants imposing limitations on incurrence of indebtedness and guarantees; liens; loans and investments; asset dispositions; dividends, redemptions, and repurchases of stock and prepayments, redemptions and repurchases of certain indebtedness; mergers, consolidations, acquisitions, joint ventures or creation of subsidiaries; material changes in business; transactions with affiliates; restrictions on distributions from subsidiaries and granting of negative pledges; changes in accounting and reporting; sale leasebacks; and speculative transactions, and 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 to the 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 December 31, 2011, we were in compliance with the covenant requirements of the ABL Facility.

 

The ABL Facility agreement contains certain events of default (applicable to us, the other borrowing subsidiaries, the guarantors and their respective subsidiaries), including nonpayment of principal, interest, fees or other amounts, violation of covenants, material inaccuracy of representations and warranties (including the existence of a material adverse event as defined in the agreement), cross-default to material indebtedness, certain events of bankruptcy and insolvency, material judgments, certain ERISA events, a change in control, and actual or asserted invalidity of liens or guarantees or any collateral document, in certain cases subject to the threshold amounts and grace periods set forth in the ABL Facility agreement.

 

On March 22, 2011, we entered into Amendment No. 1 to the ABL Facility which permits us to amend the Term Loan (and refinance those facilities in connection with such an amendment) to provide for principal amortization not exceeding 1% of the total principal amount of the Term Loan (such percentage calculated as of the date of any such amendment to the Term Loan). Amendment No. 1 also clarifies that we may, in connection with an otherwise permitted amendment to the Term Loan that refinances those facilities, increase the Term Loan up to the maximum amount permitted under the debt incurrence covenant contained in the ABL Facility.

 

On December 22, 2011, we entered into Amendment No. 2 to the ABL Facility which modifies certain of the negative covenants to provide us with additional flexibility in incurrence of indebtedness, liens, investments, certain restricted payments and repayment of other debt if certain borrowing availability tests under the ABL Facility are met.

 

At December 31, 2011 and 2010, we had no borrowings under the ABL Facility, but we had $15 million and $12 million at December 31, 2011 and 2010, respectively, 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 and 2010 we had approximately $201 million and $185 million, respectively, of undrawn availability under the ABL Facility.

 

Maturities

 

At December 31, 2011, the scheduled maturities of debt are as follows: 2012 - $6 million; 2013 - $0 million; 2014 - $0 million; 2015 - $0 million; 2016 - $295 million and thereafter $455 million.

 

Debtor-in-Possession Credit Facility

 

On March 18, 2009, in connection with the Chapter 11 filing, we entered into a $400 million senior secured super-priority debtor-in-possession DIP Credit Facility (the “DIP Credit Facility”) arranged by Citigroup Global Markets Inc. with Citibank, N.A. as administrative agent, subject to approval by the Bankruptcy Court. On March 20, 2009, the Bankruptcy Court entered an interim order approving the Debtors’ access to $190 million of the DIP Credit Facility in the form of a $165 million term loan and a $25 million revolving credit facility. The DIP Credit Facility closed on March 23, 2009 with the drawing of the $165 million term loan. The initial proceeds were used to fund the termination of the U.S. accounts receivable facility, pay fees and expenses associated with the transaction and fund business operations. On April 29, 2009, the Bankruptcy Court entered a final order providing full access to the $400 million DIP Credit Facility.

 

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On February 9, 2010, the Bankruptcy Court gave interim approval of the Amended and Restated Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “Amended DIP Credit Facility”) by and among the Debtors, Citibank N.A. and the other lenders party thereto (collectively the “Loan Syndicate”). The Amended DIP Credit Facility replaced the DIP Credit Facility. The Amended DIP Credit Facility provided for a first priority and priming secured revolving and term loan credit commitment of up to an aggregate of $450 million comprising a $300 million term loan and a $150 million revolving credit facility. The Amended DIP Credit Facility was scheduled to mature on the earliest of 364 days after the closing, the effective date of a plan of reorganization or the date of termination in whole of the Commitments (as defined in the credit agreement governing the Amended DIP Credit Facility). The proceeds of the term loan under the Amended DIP Credit Facility were used to, among other things, refinance the obligations outstanding under the previous DIP Credit Facility and provide working capital for general corporate purposes. The Amended DIP Credit Facility provided a reduction in our financing costs through reductions in interest spread and avoidance of the extension fees payable under the DIP Credit Facility in February and May 2010. The Amended DIP Credit Facility closed on February 12, 2010 with the drawing of the $300 million term loan. On February 9, 2010, the Bankruptcy Court entered an order approving full access to the Amended DIP Credit Facility, which order became final by its terms on February 18, 2010.

 

The Amended DIP Credit Facility resulted in a substantial modification for certain lenders within the Loan Syndicate given the reduction in their commitments as compared to the DIP Credit Facility. Accordingly, we recognized a $13 million charge for the year ended December 31, 2010 for the early extinguishment of debt resulting from the write-off of deferred financing costs and the incurrence of fees payable to lenders under the DIP Credit Facility. We also incurred $5 million of debt issuance costs related to the Amended DIP Credit Facility for the year ended December 31, 2010.

 

Certain fees were payable to the lenders upon the reduction or termination of the commitment and upon the substantial consummation of a plan of reorganization as described more fully in the DIP Credit Facility including an exit fee payable to the Lenders of 2% of “roll-up” commitments and 3% of all other commitments. These fees, which amounted to $11 million, were paid upon the funding of the term loan under the Amended DIP Credit Facility.

 

Borrowings under the DIP Credit Facility term loans bore interest at a rate per annum equal to 10.5%. Additionally, we paid an unused commitment fee of 1.5% per annum and a letter of credit fee of 3.75% per annum. Borrowings under the Amended DIP Credit Facility term loan bore interest at a rate per annum equal to 6%. Additionally, we paid an unused commitment fee of 1.0% per annum and a letter of credit fee of 4.5% per annum.

 

The Amended DIP Credit Facility was paid in full and terminated on the Effective Date.

 

Pre-Petition Debt Obligations

 

The Chapter 11 filing constituted an event of default under, or otherwise triggered repayment obligations with respect to, several of the debt instruments and agreements relating to direct and indirect financial obligations of the Debtors as of the Petition Date (collectively “Pre-petition Debt”). As a result, all obligations under the Pre-petition Debt became automatically and immediately due and payable. During the pendency of the Chapter 11 cases, efforts to enforce the payment obligations under the Pre-petition Debt were stayed. Further, interest accruals and payments for the unsecured Pre-petition Debt were ceased as of the Petition Date. As a result of the estimated claim recoveries reflected in the Plan filed during the second quarter of 2010, we determined that it was probable that obligations for interest on unsecured claims would ultimately be paid. As such, interest that had not previously been recorded since the Petition Date was recorded in the second quarter of 2010. The amount of post-petition interest recorded during the year ended December 31, 2010 was $137 million which represents the cumulative amount of interest for unsecured claims (including unsecured debt) accruing from the Petition Date through the Effective Date.

 

As of November 3, 2010, our Plan confirmation date, we recorded the allowed claims for our “make-whole” settlement on the $500 million of 6.875% Notes Due 2016 (“2016 Notes”) and our “no-call” settlement on the $150 million 6.875% Debentures due 2026 (“2026 Debentures”). We recorded these claims in 2010 in the amount of $70 million within loss on early extinguishment of debt in our Consolidated Statements of Operations.

 

As of December 31, 2010, all claims relating to Pre-petition Debt have been settled and paid in accordance with the provisions of the Plan.

 

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9)LEASES

 

At December 31, 2011, minimum rental commitments, primarily for buildings, land and equipment under non-cancelable operating leases, net of sublease income, amounted to $13 million (2012), $12 million (2013), $10 million (2014), $8 million (2015), $8 million (2016), $24 million (2017 and thereafter) and $75 million in the aggregate. Sublease income is not significant in future periods. Rental expenses under operating leases, net of sublease income were $25 million (2011), $24 million (2010) and $29 million (2009). Sublease income was less than $1 million in 2011, 2010 and 2009.

 

Future minimum lease payments under capital leases at December 31, 2011 were not significant.

 

Real estate taxes, insurance and maintenance expenses are generally our obligations and, accordingly, were not included as part of rental payments. It is expected that in the normal course of business, leases that expire will be renewed or replaced by similar leases.

 

10)Income Taxes

 

The components of earnings (loss) from continuing operations before income taxes and the income tax expense(benefit) are as follows:

 

(In millions)  2011   2010   2009 
             
Pre-tax Earnings (Loss) from Continuing Operations:               
Domestic  $27   $(622)  $(206)
Foreign   118    72    (10)
   $145   $(550)  $(216)
                
Income Tax Expense (Benefit)               
Domestic               
Current  $1   $(26)  $15 
Deferred   3    31    (22)
    4    5    (7)
Foreign               
Current   30    14    (5)
Deferred   (9)   3    22 
    21    17    17 
Total               
Current   31    (12)   10 
Deferred   (6)   34    - 
   $25   $22   $10 

 

The expense (benefit) for income taxes from continuing operations differs from the Federal statutory rate for the following reasons:

 

(In millions)  2011   2010   2009 
Income tax expense (benefit) at the U.S. statutory rate  $50   $(193)  $(76)
Antitrust legal settlements   -    (2)   1 
Foreign rate differential   (26)   (3)   22 
State income taxes, net of federal benefit   -    1    1 
Tax audit settlements   -    (13)   - 
Valuation allowances   (18)   307    100 
U.S. tax on foreign earnings   28    (135)   (1)
Nondeductible reorganizational expenses   3    23    15 
Nondeductible expenses, other   1    1    1 
Nondeductible stock compensation   1    14    - 
Depletion   (2)   (5)   (2)
Post-petition interest expense   -    22    (22)
Goodwill   -    19    - 
Income tax credits   (14)   (9)   (7)
Taxes attributable to prior periods   2    (4)   (21)
Other, net   -    (1)   (1)
Income tax expense  $25   $22   $10 

 

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Deferred taxes are recorded based on differences between the book and tax basis of assets and liabilities using currently enacted tax rates and regulations. The components of the deferred tax assets and liabilities are as follows:

 

(In millions)  2011   2010 
Deferred tax assets:          
Pension and other post-retirement liabilities  $177   $180 
Net operating loss carryforwards   422    443 
Other accruals   44    22 
Tax credit carryforwards   82    64 
Accruals for environmental remediation   26    37 
Inventories and other   29    25 
Financial instruments   5    4 
Total deferred tax assets   785    775 
Valuation allowance   (695)   (697)
Net deferred tax assets after valuation allowance   90    78 
           
Deferred tax liabilities:          
Unremitted foreign earnings of subsidiaries   (7)   (5)
Property, plant and equipment   (81)   (64)
Intangibles   (33)   (30)
Other   -    (16)
Total deferred tax liabilities   (121)   (115)
Net deferred tax liability after valuation allowance  $(31)  $(37)

 

Net current and non-current deferred taxes from each tax jurisdiction are included in the following accounts:

 

(In millions)  2011   2010 
Net current deferred taxes          
Other current assets  $6   $9 
Other current liabilities   (10)   (7)
Net non-current deferred taxes          
Other assets   20    21 
Other liabilities   (47)   (60)

 

We had valuation allowances related to U.S. operations of $652 million, $652 million and $310 million at December 31, 2011, 2010 and 2009, respectively. We had valuation allowances related to foreign operations of $43 million, $45 million and $70 million at December 31, 2011, 2010 and 2009, respectively. A valuation allowance has been provided for deferred tax assets where it is more likely than not these assets will expire before we are able to realize their benefit. Of the $2 million reduction in the total valuation allowance during 2011, $16 million was recorded to the income tax benefit in our Consolidated Statements of Operations and $14 million was recorded to other comprehensive loss in our Consolidated Balance Sheet. Of the $317 million change in the total valuation allowance during 2010, $310 million was recorded to the income tax provision in our Consolidated Statements of Operations and $7 million was recorded to other comprehensive loss in our Consolidated Balance Sheet. This valuation allowance will be maintained until it is more likely than not that remaining deferred assets will be realized. When this occurs, our income tax expense will be reduced by a decrease in our valuation allowance, which could have a significant impact on our future earnings.

 

The components of our gross net operating loss (“NOL”) are as follows:

 

(In millions)  2011   2010 
         
Federal NOL  $1,057   $1,050 
State NOL  $1,237   $1,313 
Foreign NOL  $82   $304 

 

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State and foreign NOL and credits expire 2012-2031, federal credits expire 2013-2031 and federal NOL expire 2024-2031. As a result of our emergence from Chapter 11 Bankruptcy in 2010, we will be subject to annual federal NOL limitations under Internal Revenue Code (“IRC”) Section 382 in the future. Our federal NOL annual limitation will be in the range of $59 million to $77 million starting in 2011 and beyond. At December 31, 2011, we had federal and state tax credit carryforwards of $79 million and $3 million, respectively. At December 31, 2010, we had federal and state tax credit carryforwards of $61 million and $3 million, respectively.

 

We consider undistributed earnings of certain foreign subsidiaries to be indefinitely invested in their operations. At December 31, 2011, such undistributed earnings amounted to $753 million. As a result of our emergence from Chapter 11 in 2010, and the significant reduction in debt, we have determined that we will no longer need to repatriate certain undistributed earnings of our foreign subsidiaries to fund U.S. operations. Also, we have plans to invest such undistributed earnings indefinitely. As such, the amount of foreign subsidiaries undistributed earnings considered to be indefinitely invested in their foreign operations has been increased. The effect of such change in the year ended December 31, 2011 is a reduction of $3 million in U.S. deferred income tax liability on such undistributed earnings. In 2011, this reduction in U.S. taxes on unremitted foreign earnings has been offset by an equal increase in the valuation allowance related to U.S. deferred tax assets, and, as such, had no net effect on tax expense recognized in our Consolidated Statements of Operations.

 

We also have not recognized a deferred tax liability for the difference between the book basis and tax basis of investments in the common stock of foreign subsidiaries. Such differences relate primarily to the unremitted earnings of both Witco’s and Great Lakes’ foreign subsidiaries prior to their mergers with us. The basis difference in subsidiaries of Witco, acquired on September 1, 1999, is approximately $237 million and the basis difference in subsidiaries of Great Lakes, acquired on July 1, 2005, is approximately $62 million. Estimating the tax liability that would arise if these earnings were repatriated is not practicable at this time.

 

During the year ended December 31, 2011, we recorded an increase to our liability for unrecognized tax benefits of approximately $5 million. This increase was primarily related to a foreign tax matter dating back to the 1990s. During the year ended December 31, 2010, we recorded a decrease to our liability for unrecognized tax benefits of approximately $35 million. This decrease was primarily related to the completion of our federal IRS examination for the 2006-2007 tax years. In accordance with ASC 740, we recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

 

The beginning and ending amount of unrecognized tax benefits reconciles as follows:

 

(In millions)  2011   2010   2009 
Balance at January 1  $41   $76   $85 
                
Gross increases for tax positions taken during current year   1    -    2 
Gross increases for tax positions taken during a prior period   13    3    45 
Gross decreases for tax positions taken during a prior period   (5)   (10)   (44)
Gross decreases due to bankruptcy claims adjustment   -    -    (5)
Decreases from the expiration of the statute of limitations   (1)   -    (1)
Settlements / payments   (1)   (29)   (8)
Foreign currency impact   (2)   1    2 
                
Balance at December 31  $46   $41   $76 

 

We recognized $1 million of interest expense, $1 million of interest income and $1 million of interest expense related to unrecognized tax benefits within tax expense in our Consolidated Statements of Operations in 2011, 2010 and 2009, respectively. We also recognized, in our Consolidated Balance Sheets at December 31, 2011 and 2010, a total amount of $12 million and $11 million of interest, respectively, related to unrecognized tax benefits.We file income tax returns in the U.S., various U.S. states and certain foreign jurisdictions. We have completed our federal examination through December 31, 2007. The tax years 2008-2010 remain open to examination.

 

Foreign and United States jurisdictions have statutes of limitations generally ranging from 3 to 5 years. We have a number of state, local and foreign examinations currently in process. Major foreign exams in process include Canada, Germany and Switzerland.

 

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We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $21 million within the next year. This reduction may occur due to the statute of limitations expirations 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 statute of limitations. This change is not expected to have a significant impact on our results of operations or financial condition.

 

11)CAPITAL STOCK AND EARNINGS (LOSS) PER COMMON SHARE

 

Capital Stock

 

New Shares

 

Pursuant to the Plan, all shares, including shares held in treasury, of our common stock outstanding prior to the Effective Date were canceled. On November 8, 2010, the NYSE approved for listing 111 million shares of common shares in the capital of the reorganized company authorized pursuant to the Plan, (“the New Common Stock”), as, comprising: (i) approximately 95.5 million shares of New Common Stock to be issued under the Plan; (ii) approximately 4.5 million shares of New Common Stock reserved for future issuances under the Plan as disputed claims are settled; and (iii) 11 million shares of New Common Stock reserved for issuance under our equity compensation plans.

 

At December 31, 2011, approximately 1.9 million reserved shares of New Common Stock remain to be issued to either settle disputed claims or to holders of previously issued Chemtura stock (“Holders of Interests”). These shares were not accounted for as of December 31, 2011 and will be recognized at the date issued and measured based on the fair value of our common stock at that time. For settlements of liabilities, the difference between the fair value of the stock issued compared to the liability amount will be recognized in our Consolidated Statements of Operations.

 

We are authorized to issue 500 million shares of $0.01 par value common stock. There were 98.3 million shares issued, of which 2.0 million were held in treasury at December 31, 2011 and there were 95.6 million shares issued at December 31, 2010. We are authorized to issue 0.3 million shares of $0.01 par value preferred stock, none of which are outstanding.

 

Old Shares

 

We were authorized to issue 500 million shares of $0.01 par value common stock. There were 254.4 million shares issued at December 31, 2009, respectively, of which 11.5 million were held as treasury stock at December 31, 2009. We were authorized to issue 0.3 million shares of $0.10 par value preferred stock, none of which were outstanding.

 

The 254.4 million shares of common stock, the 11.5 million shares of treasury stock and the preferred stock right were all canceled upon the Effective Date.

 

Treasury Stock

 

On October 18, 2011, we announced that our Board of Directors (the “Board”) has authorized us to repurchase up to $50 million of our common stock over the next twelve months. The shares are expected to be repurchased from time to time through open market purchases. The program, which does not obligate us to repurchase any particular amount of common stock, may be modified or suspended at any time at the Board’s discretion. The manner, price, number and timing of such repurchases, if any, will be subject to a variety of factors, including market conditions and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). As of December 31, 2011, we had purchased 2.0 million shares for $22 million.

 

Earnings (Loss) per Common Share

 

A portion of the 100 million (which excludes shares reserved for equity compensation plans) newly authorized common shares were immediately distributed, and the remainder was reserved for distribution to holders of certain disputed claims that, although unresolved as of the Effective Date, later become allowed. To the extent that any of the reserved shares remain undistributed upon resolution of the disputed claims, such shares will not be returned to us but rather will be distributed pro rata to claimants with allowed claims or to holders of our previously outstanding common stock to increase their recovery under the Plan. Therefore, pursuant to the Plan, all 100 million shares ultimately will be distributed. Accordingly, although the reserved shares are not yet issued and outstanding, all conditions of distribution had been met for these reserved shares as of the Effective Date, and such shares are considered issued and are included in our calculation of weighted average shares outstanding.

 

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The computation of basic earnings (loss) per common share is based on the weighted average number of common shares outstanding. The computation of diluted earnings (loss) per common share is based on the weighted average number of common and common share equivalents outstanding. For the years ended December 31, 2010 and 2009, the computation of diluted earnings (loss) per share equals the basic earnings (loss) per common share calculation since common stock equivalents were antidilutive due to losses from continuing operations.

 

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

 

   Year ended 
(In millions)  2011   2010   2009 
Weighted average shares outstanding - Basic   100.1    223.0    242.9 
Dilutive effect of common share equivalents   0.2    -    - 
Weighted average shares outstanding - Diluted   100.3    223.0    242.9 

 

The weighted average shares outstanding for 2010 were based upon 243 million of old shares outstanding for approximately 10 months and approximately 100 million of new shares outstanding for approximately 2 months. Although EPS information for the years ended December 31, 2010 and 2009, is presented, it is not comparable to the information presented for the year ended December 31, 2011, due to the changes in our capital structure on the Effective Date.