Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Commission File Number) 1-15339

CHEMTURA CORPORATION

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes                    o No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes                    x No

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

Table of Contents

CHEMTURA CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2008

1

Table of Contents

PART I.     FINANCIAL INFORMATION

ITEM 1.     Financial Statements

CHEMTURA CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)

See accompanying notes to consolidated financial statements.

2

Table of Contents

CHEMTURA CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except per share data)

See accompanying notes to consolidated financial statements.

3

Table of Contents

CHEMTURA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)

See accompanying notes to consolidated financial statements.

4

Table of Contents

CHEMTURA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

The information in the foregoing consolidated financial statements for the quarter and nine months ended September 30, 2008 and September 30, 2007 is unaudited, but reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented.  All such adjustments are of a normal recurring nature, except as otherwise disclosed in the accompanying notes to the consolidated financial statements.

The foregoing consolidated financial statements include the accounts of Chemtura Corporation and the wholly-owned and majority-owned subsidiaries that it controls, which are collectively referred to as “the Company.”  Other affiliates in which the Company has 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 the Company has less than 20% ownership are recorded at cost.  All significant intercompany balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the prior period financial information to conform to the current period presentation.  The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2007 Annual Report on Form 10-K.  The consolidated results of operations for the quarter and nine months ended September 30, 2008 are not necessarily indicative of the results expected for the full year.

ACCOUNTING POLICIES

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 expenses (“SG&A”) 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 expenses (“R&D”) include basic and applied R&D 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 the consolidated statements of operations.

Other income (expense), net

Other income (expense), net includes costs associated with the Company’s securitization programs, foreign exchange gains (losses), interest income and minority interest income (expense).

Other Items

Cash and cash equivalents include bank term deposits with original maturities of three months or less.  Included in cash and cash equivalents in the Company’s consolidated balance sheets at September 30, 2008 and December 31, 2007 are $1 million and $2 million, respectively, of restricted cash that is required to be on deposit to support certain letters of credit and performance guarantees, the majority of which will be settled within one year.

Included in accounts receivable are allowances for doubtful accounts of $32 million at both September 30, 2008 and December 31, 2007.

During the first nine months of 2008 and 2007, the Company made interest payments of approximately $60 million and $67 million, respectively.  During the first nine months of 2008 and 2007, the Company made payments for income taxes (net of refunds) of $28 million and $35 million, respectively.

On October 31, 2008, the Company announced that it would suspend payment of dividends to conserve cash and expand liquidity.

5

Table of Contents

Earnings from discontinued operations for the third quarter of 2007 were $3 million (net of $2 million of tax) and primarily reflect the operations of the fluorine and optical monomers businesses that were subsequently sold.  Earnings from discontinued operations in the nine months ended September 30, 2007 of $14 million (net of $7 million of tax) primarily represent the operations of the EPDM, fluorine and optical monomers businesses that were subsequently sold.

Loss on sale of discontinued operations in the third quarter of 2007 of $2 million (net of $1 million of tax) related to the sale of the EPDM business.  The gain on sale of discontinued operations in the nine months ended September 30, 2007 of $25 million (net of $13 million of tax), represents $23 million related to the sale of the EPDM business and $2 million related to the final contingent earn-out proceeds related to the sale of the OrganoSilicones business.

ACCOUNTING DEVELOPMENTS

Implemented in 2008

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The provisions of FAS 159 are effective as of the beginning of the Company’s 2008 fiscal year.  The Company elected to not fair value existing eligible items, beginning January 1, 2008.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“FAS 157”), which establishes a comprehensive framework for measuring fair value and expands disclosures about fair value measurements. The provisions of FAS 157, specifically for financial assets and liabilities, are effective as of the beginning of the Company’s 2008 fiscal year.  The Company values financial instruments using Level 2, observable inputs.  The Company carries derivative instruments at fair value.

Future Implementations

In February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of  FAS 157 for all nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008.  The Company is currently evaluating the potential impact that the application of FAS 157 to its nonfinancial assets and liabilities will have on its consolidated results of operations.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”), which will require companies to treat noncontrolling interests (commonly referred to as minority interest) as a separate component of shareholders’ equity and not as a liability.  The provisions of FAS 160 are effective as of the beginning of the Company’s 2009 fiscal year.  The Company is assessing the impact of adopting FAS 160 on its consolidated financial position and results of operations.

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“FAS 141(R)”), which requires that identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination be recorded at full fair value.  The provisions of FAS 141(R) are effective as of the beginning of the Company’s 2009 fiscal year. The Company is assessing the impact of adopting FAS 141(R) on its consolidated financial position and results of operations.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”), which will require companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows.  The provisions of FAS 161 are effective as of the beginning of the Company’s 2009 fiscal year.  The Company is assessing the impact of adopting FAS 161 on its consolidated financial position and results of operations.

6

Table of Contents

2) COMPREHENSIVE (LOSS) INCOME

An analysis of the Company’s comprehensive (loss) income follows:

The components of accumulated other comprehensive income at September 30, 2008 and December 31, 2007 are as follows:

Reclassifications from other comprehensive income to earnings related to the Company’s natural gas price swap contracts aggregated to an immaterial pre-tax loss and a $1 million pre-tax loss during the quarters ended September 30, 2008, and 2007, respectively, and a $1 million pre-tax loss and an $10 million pre-tax loss during the nine months ended September 30, 2008 and 2007, respectively.

3) ACQUISITIONS AND DIVESTITURES

Baxenden and GLCC Laurel Acquisitions

On February 29, 2008, the Company acquired the remaining stock of Baxenden Chemicals Limited Plc for approximately $26 million.  Assets acquired included plant, property and equipment of $18 million; accounts receivable of $7 million; intangible assets of $7 million; goodwill of $6 million; inventory of $4 million and other assets of $3 million offset by a pension liability of $7 million; accounts payable of $6 million; deferred taxes of $5 million and accrued expenses of $1 million.

On March 12, 2008, the Company purchased the remaining interest in GLCC Laurel, LLC for a note payable of $11 million.  The note was paid in September 2008.  As GLCC Laurel, LLC was already being consolidated by the Company, the purchase price was allocated to reduce the minority interest liability by $23 million.  The value of the long-lived assets was reduced by $14 million (as the fair value of the assets exceeded the purchase price).  The residual purchase price was allocated to other assets.

Fluorine Divestiture

On January 31, 2008, the Company completed the sale of its fluorine chemical business located at the Company’s El Dorado, Arkansas facility for an immaterial net loss.  The assets sold consisted of patents and intangible assets of $12 million, inventory of $8 million, fixed assets of $8 million and other current liabilities of $1 million.  The fluorine chemical business had revenues of approximately $49 million in 2007.  The fluorine chemical business is reported as a discontinued operation in the accompanying consolidated financial statements.

Oleochemicals Divestiture

On February 29, 2008, the Company completed the sale of its oleochemicals business and recorded a net loss of $26 million.  The assets sold included inventory of $26 million, accounts receivable of $24 million, goodwill of $12 million, net fixed assets of $7 million, and intangible assets of $1 million.  The oleochemicals business had revenues of approximately $175 million in 2007.  Proceeds from the transaction were used to reduce debt.

7

Table of Contents

4) ACCOUNTS RECEIVABLE PROGRAMS

The Company has a committed domestic accounts receivable securitization program to provide funding for up to $275 million of domestic receivables to agent banks until August 28, 2010.  Accounts receivable sold under this program were $136 million and $119 million as of September 30, 2008 and December 31, 2007, respectively.  Under the domestic program, certain subsidiaries of the Company sell their accounts receivable to a special purpose entity (“SPE”) that has been created for the purpose of acquiring such receivables and selling an undivided interest therein to agent banks.  In accordance with the domestic sale agreement, the agent banks purchase an undivided ownership interest in the accounts receivable owned by the SPE.  The amount of such undivided ownership interest will vary based on the level of eligible accounts receivable as defined in the agreement.  In addition, the agent banks retain a security interest in all the receivables owned by the SPE, which was $149 million and $163 million as of September 30, 2008 and December 31, 2007, respectively.  The balance of the unsold receivables owned by the SPE is included in the Company’s accounts receivable balance on the consolidated balance sheet.

In addition, the Company’s European subsidiaries have a separate program to sell up to approximately $254 million of their eligible accounts receivable to an agent bank as of September 30, 2008.  International accounts receivable sold under this program were $177 million and $120 million as of September 30, 2008 and December 31, 2007, respectively.  Under the international program, certain foreign subsidiaries of the Company sell eligible accounts receivable directly to agent banks.

The total costs associated with these programs of $4 million and $5 million for the quarters ended September 30, 2008 and 2007, respectively, and $12 million and $16 million for the nine months ended September 30, 2008 and 2007, respectively, are included in other income (expense), net in the consolidated statements of operations.  During the period, the Company had an obligation to service the accounts receivable sold under its domestic and international programs. The Company has treated the transfer of receivables under its domestic and international receivable programs as a sale of accounts receivable.

5) INVENTORIES

Components of inventories are as follows:

Included in the above net inventory balances are inventory obsolescence reserves of approximately $32 million and $40 million at September 30, 2008 and December 31, 2007, respectively.

6) PROPERTY, PLANT AND EQUIPMENT

8

Table of Contents

Depreciation expense from continuing operations amounted to $43 million and $48 million for the quarters ended September 30, 2008 and 2007, respectively, and $148 million and $163 million for the nine months ended September 30, 2008 and 2007, respectively.  Depreciation expense from continuing operations includes accelerated depreciation of certain fixed assets associated with the Company’s restructuring programs, divestment activities and the consolidation of its legacy ERP systems of $8 million and $10 million for the quarters ended September 30, 2008 and 2007, respectively, and $39 million and $46 million for the nine months ended September 30, 2008 and 2007, respectively.

An impairment charge of $1 million was recorded in the third quarter of 2008 related to the Company’s Catenoy, France facility in accordance with FASB Statement No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets.”

7) GOODWILL AND INTANGIBLE ASSETS

Goodwill by reportable segment is as follows:

The Company has elected to perform its annual goodwill impairment procedures for all of its reporting units in accordance with Statement No. 142, “Goodwill and Other Intangible Assets” as of July 31, or sooner, if events occur or circumstances change that could reduce the fair value of a reporting unit below its carrying value.  The Company estimates the fair value of its reporting units utilizing income and market approaches through the application of discounted cash flow and market comparable methods.  The assessment is required to be performed in two steps, step one to test for a potential impairment of goodwill and, if potential losses are identified, step two to measure the impairment loss via a full fair valuing of the assets and liabilities of the reporting unit utilizing the purchase method of accounting.

During the quarter ended June 30, 2008, the Company updated its long-term financial projections for each of its businesses.  The projections for the Consumer Products segment indicated an inability to sustain the level of goodwill associated with that segment.  An estimated goodwill impairment charge of $320 million was recorded in this reporting unit in the second quarter of 2008.  The Company finalized its review of the estimated charge in the third quarter of 2008 and no change to the estimated charge was required.

The Company’s cash flow projections, used to estimate the fair value of its reporting units, are based on subjective estimates.  Although the Company believes that its projections reflect its best estimates of the future performance of its reporting units, changes in estimated revenues or operating margins could have an impact on the estimated fair values.  Any increases in estimated reporting unit cash flows would have had no impact on the carrying value of that reporting unit.  However, a decrease in future estimated reporting unit cash flows could require the Company to determine whether recognition of a goodwill impairment charge was required.  Based on the estimated fair values used to test goodwill for impairment in accordance with FASB Statement No. 142, the Company concluded that no impairment existed in any of its reporting units at July 31, 2008.

As the third quarter of 2008 progressed, significant weakness developed in global financial markets, resulting in decreases in the valuation of public companies and restricted availability of capital.  Further, it appears that the global economy may be entering into a recession.  During this period, the Company’s stock price has fallen to a value that is at a significant discount to the per share value of the Company’s book value.  These events were of sufficient magnitude for the Company to conclude that it was appropriate to perform a goodwill impairment review as of September 30, 2008.

9

Table of Contents

With the speed of events, there is not yet a body of forecast information to assess the likely intensity or duration of the recession or quantify the likely impact on the markets it supplies.  Additionally, the financial crisis has been accompanied by reductions in spot commodity prices that may result in a reversal of the raw material inflation the Company has experienced during the last year.  The Company has therefore used its own current estimates of the effects of the macroeconomic changes on the markets its serves to develop an updated view of its projections.  Those updated projections have been used to compute updated estimated fair values of its reporting units.  Based on these estimated fair values used to test goodwill for impairment in accordance with FASB Statement No. 142, the Company concluded that no impairment existed in any of its reporting units at September 30, 2008.

In reviewing the goodwill impairment test as of September 30, 2008, the Company concluded:

·                  If the operating margin used in estimating the fair value of the Polymer Additives reporting unit were assumed to be 50 basis points lower in all forecast periods, the carrying value of the reporting unit would exceed the estimated fair value by approximately $40 million.

·                  If the operating margin used in estimating the fair value of the Consumer Products reporting unit were assumed to be 50 basis points lower in all forecast periods, the carrying value of the reporting unit would exceed the estimated fair value by approximately $125 million.

As these scenarios evidence, the Polymer Additives and Consumer Products reporting units are particularly sensitive to any further revisions in its future projections.  If either of these events occurred, the Company would then determine whether recognition of a goodwill impairment charge would be required.

The Company continually monitors and evaluates business and competitive conditions that affect its operations and reflects the impact of these factors in its financial projections. The Company also monitors its stock price over time as an indicator of changes in the fair value of its business.  If permanent or sustained changes in business, competitive conditions or stock price occur, they can lead to revised projections that could potentially give rise to impairment charges.

The Company’s intangible assets (excluding goodwill) are comprised of the following:

The decrease in gross intangible assets since December 31, 2007 is primarily due to the sale of the fluorine and oleochemicals businesses and foreign currency translation, partially offset by additions of assets when the Company acquired the remaining stock of Baxenden Chemicals Limited Plc.  Assets acquired in the Baxenden transaction included patents of $1 million (weighted average useful life of 7 years), trademarks of $1 million (useful life of 25 years) and customer relationships of $5 million (useful life of 30 years).

Amortization expense from continuing operations related to intangible assets amounted to $10 million and $11 million for the quarters ended September 30, 2008 and 2007, respectively, and $32 million and $29 million for the nine months ended September 30, 2008 and 2007, respectively.

8) INDEBTEDNESS

The Company is a party to a senior credit agreement that provides revolving credit and letter of credit facilities up to an amount of $750 million ($740 million currently committed by the lenders). The facilities are committed until July 2010.  At September 30, 2008, drawings under the senior credit agreement were $70 million.  There were no borrowings under the senior credit agreement at December 31, 2007.

On November 5, 2008, Standard and Poor’s Ratings Service lowered its corporate credit and senior unsecured debt ratings on Chemtura to BB- from BB.  Their ratings outlook is negative.  As a result of the reduction in the rating, under the terms of its senior credit facility, the spread over LIBOR for advances under the facility increases from 1.25% to 1.60%.

10

Table of Contents

In February 2008, the Company repurchased $30 million of its then outstanding $400 million 7% Notes Due 2009 (“2009 Notes”).  The loss associated with the early extinguishment of the debt was immaterial for the nine months ended September 30, 2008.

The Company and the Domestic Subsidiary Guarantors are required to provide a security interest in the stock of their first tier subsidiaries and other equity interests (limited to 66% of the voting stock of first-tier foreign subsidiaries) pursuant to a covenant in the Company’s credit facility.  Additionally, under the terms of the indentures for the 2009 Notes, 6.875% Notes due 2016 and the 6.875% Debentures due 2026 (the “Notes”), the Company would be required to secure the Notes on an equal and ratable basis with other certain indebtedness if secured debt thresholds are exceeded.  The Company amended and restated its Pledge Agreement on July 31, 2007 so that the credit facility would only be secured up to the lowest debt threshold amount under the Notes.

The Company’s various debt agreements contain covenants that limit the Company’s ability to enter into certain transactions, such as incurring additional indebtedness, increasing the Company’s dividends, and entering into acquisitions, dispositions and joint ventures.  When giving notice of borrowing under the senior credit agreement, the Company is required to make certain customary representations, to the lenders, including that no material adverse change (as defined in the agreements) in the business has occurred since December 31, 2004.  The Company is required to report compliance with certain financial covenants to its lenders under the senior credit agreement on a quarterly basis including two financial maintenance covenants.

·                  The Company is required to maintain a leverage ratio (adjusted total debt (“Total Debt”) to adjusted earnings before interest, taxes, depreciation and amortization (“Bank EBITDA”) where Total Debt must not exceed three times Bank EBITDA (with adjustments to both debt and earnings being made in accordance with the terms of the credit facility agreement).  As of September 30, 2008 Total Debt was 2.7 times Bank EBITDA.

·                  An interest coverage ratio (Bank EBITDA to interest expense as defined in the credit facility agreement) where Bank EBITDA must be at least 4.5 times interest expense.  As of September 30, 2008 Bank EBITDA was 5.4 times interest expense.

The Company was in compliance with the covenants under its various debt agreements at September 30, 2008 and expects to be in compliance over the next twelve months and future periods.

The 2009 Notes, which mature in July 2009, have been classified under short-term borrowings as of September 30, 2008.  The Company intends to refinance its 2009 Notes with the issuance of new long-term financing or proceeds from the sale of assets.  Should financial market conditions preclude a long-term refinancing prior to the maturity, the Company will refinance the notes from other sources of liquidity including utilizing its existing $750 million senior credit agreement that is not due until July 2010.  The Company would then refinance the debt with long-term debt when market conditions permit.  The Company expects to have sufficient availability under the senior credit agreement in the period ending July 2009 to permit the redemption of the full amount of the 2009 Notes.

9) INCOME TAXES

The Company reported income tax expense from continuing operations for the quarter ended September 30, 2008 of $17 million and an income tax benefit of $6 million for the quarter ended September 30, 2007.  The Company reported income tax expense from continuing operations of $37 million for the nine months ended September 30, 2008 and an income tax benefit of $1 million for the nine months ended September 30, 2007.  The Company has established a valuation allowance against the tax benefits associated with the Company’s year to date U.S. net operating loss.  The Company will continue to adjust its tax provision rate through the establishment, or release, of the non-cash valuation allowance attributable to currently generated U.S. pre-tax losses until such time as the U.S. operations have evidenced the ability to consistently generate income such that in future periods the Company can expect that the deferred tax assets can be utilized on a more-likely-than-not basis.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1, 2007.

The Company has net liabilities related to unrecognized tax benefits of $52 million at September 30, 2008 and $66 million at December 31, 2007.  The change primarily relates to the settlement of tax audits.

In accordance with FIN 48, the Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense.  Accrued interest and penalties are included within the related liability lines in the consolidated balance sheet.

11

Table of Contents

The Company believes it is reasonably possible that its unrecognized tax benefits may decrease approximately $15 million within the next year.  This reduction may occur due to the conclusion of examinations by tax authorities.  The Company further expects that the amount of unrecognized tax benefits will continue to change as the result of ongoing operations, the outcomes of tax audits, and the passing of statutes of limitations.  This change is not expected to have a significant impact on the results of operations or the financial position of the Company.

During the quarter ended June 30, 2008, the Company established a valuation allowance of $10 million against deferred tax assets in Brazil as management has concluded that it is not likely that, based on prior year’s cumulative losses, the deferred tax assets will be realized as the entity’s profitability is unlikely to increase to a level that can utilize these assets in the near term.

10) EARNINGS PER COMMON SHARE

The computation of basic earnings per common share is based on the weighted average number of common shares outstanding.  The computation of diluted earnings per common share is based on the weighted average number of common and common equivalent shares outstanding.  The computation of diluted earnings per common share equals the basic earnings per common share for the nine months ended September 30, 2008 and 2007 since the common stock equivalents were antidilutive as a result of the Company’s net loss from continuing operations. The Company had no common stock equivalents for the quarters ended September 30, 2008 and 2007 and nine months ended September 30, 2008.  Common stock equivalents amount to 0.7 million shares for the nine months ended September 30, 2007.

Shares used in the computations for the quarters ended September 30, 2008 and 2007 are 242.4 million and 241.9 million, respectively, and for the nine months ended September 30, 2008 and 2007 are 242.3 million and 241.4 million, respectively.

The Company’s outstanding stock options of 13.0 million and 9.1 million shares at September 30, 2008 and 2007, respectively, were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average price of the Company’s common stock.  These options could be dilutive if the average share price increases and is greater than the exercise price of these options.  The Company’s performance-based restricted shares of 2.0 million and 1.6 million at September 30, 2008 and 2007, respectively, were also excluded from the calculation of diluted earnings per share because the specified performance criteria for the vesting of these shares had not yet been met.  These restricted shares could be dilutive in the future if the specified performance criteria are met.

11) STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of FASB Statement No. 123 (revised 2004), “Share-Based Payment.”  Stock-based compensation expense, including amounts for restricted stock and options, was $1 million and $2 million for the quarters ended September 30, 2008 and 2007, respectively and $6 million and $8 million for the nine month periods ended September 30, 2008 and 2007, respectively.  In 2008 and 2007, stock-based compensation expense was primarily reported in SG&A.

Stock Option Plans

In February 2008, the Company’s Board of Directors approved the grant of options covering 2.7 million shares, with an exercise price equal to the fair market value of the underlying common stock at the date of grant.  These options will vest ratably over a four-year period.

The Company uses the Black-Scholes option-pricing model to determine the compensation expense related to stock options.  The Company has elected to recognize compensation cost for option awards granted equally over the requisite service period for each separately vesting tranche, as if multiple awards were granted.  Using this method, the weighted average fair value of stock options granted during the quarters ended September 30, 2008 and 2007 was $2.50 and $4.72, respectively, and for the nine months ended September 30, 2008 and 2007 was $3.39 and $5.40, respectively. Total remaining unrecognized compensation cost associated with unvested stock options at September 30, 2008 was $8 million, which will be recognized over the weighted average period of approximately one year.

Restricted Stock Plans

In February 2008, the Board of Directors granted long-term incentive awards in the amount of 0.4 million shares of restricted stock, which will vest three and a half years from the date of grant.

12

Table of Contents

In February 2008, the Board of Directors approved a grant of long-term incentive awards of restricted stock, which carries a performance condition requirement.  The performance award will be based on accomplishment against goal for 2008, 2009, and 2010 cumulative earnings before interest, taxes, depreciation and amortization (EBITDA).  Results of EBITDA will be adjusted to exclude certain categories of income and expense as defined in the award.  The awards are for a maximum of 0.8 million shares.  Share awards based upon the achievement of the performance milestones will become vested and distributed on February 1, 2011.

Additionally, in February 2008, grants of 0.1 million shares of restricted stock were approved to non-employee directors, which are to be paid out upon retirement from the Chemtura Board of Directors.  The grants of shares do not contain market condition requirements.

Total remaining unrecognized compensation cost associated with unvested restricted stock awards at September 30, 2008 was $6 million, which will be recognized over the weighted average period of approximately one year.

12) PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

On December 31, 2006 the Company adopted SFAS 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, 132(R) (“FAS 158”).  FAS 158 requires that, no later than 2008, the Company’s assumptions used to measure the annual pension and postretirement benefit expense be determined as of the balance sheet date and all plan assets and liabilities be reported as of that date.  Accordingly, as of the beginning of the 2008 fiscal year, the Company changed the measurement date for the annual pension and postretirement benefit expense and all plan assets and liabilities from November 30 to the year-end balance sheet date.  As a result of this change in measurement date, the Company recorded an after tax increase of $1 million to accumulated deficit as of January 1, 2008.

Components of the Company’s defined benefit plans net periodic benefit (credit) cost for the quarter and nine months ended September 30, 2008 and 2007 are as follows:

(a) For the nine months ended September 30, 2008, the Company recorded a curtailment gain of $6 million due to the decision to eliminate furture earnings benefits of participants in certain international pension plans along with a settlement loss of $1 million for certain participants whose postions were eliminated.

The Company contributed $8 million and $12 million to its domestic non-qualified and international pension plans, respectively, for the nine months ended September 30, 2008.  Contributions to post-retirement health care plans for the first nine months of 2008 were $13 million.  The Company expects additional contributions of approximately $8 million and $5 million to its international and non-qualified pension plans and post-retirement health care plans in the fourth quarter of 2008, respectively.  No 2008 contributions are projected for the qualified domestic plans.  The Company’s funding assumptions for

13

Table of Contents

its domestic pension plans assume no significant change with regard to demographics, legislation, plan provisions, or actuarial assumptions or methods to determine the estimated funding requirements.

In light of current equity market conditions, it is anticipated that the fair value of the equity assets of the Company’s qualified domestic and international pension plans will have declined during 2008.  This will likely result in an increase in the net periodic cost of these plans in 2009 and increase the Company’s contributions to the plans in future years.  The conditions in the financial markets may also result in changes in the discount rate and expected rate of return used in the actuarial computations related to the plans.

13) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses price swap contracts as cash flow hedges to convert a portion of its forecasted natural gas purchases from variable price to fixed price purchases.  These contracts are designated as hedges of a portion of the Company’s forecasted natural gas purchases.  These contracts involve the exchange of payments over the life of the contracts without an exchange of the notional amount upon which the payments are based.  The differential paid or received as natural gas prices change is recognized as an adjustment to cost of goods sold.

In the fourth quarter of 2007, the Company ceased the purchase of additional price swap contracts as cash flow hedges of forecasted natural gas purchases and established fixed price contracts with physical delivery with its natural gas vendor.  The existing price swap contracts mature through 2009.

The following table summarizes the unrealized (gains) and losses related to certain cash flow hedging for the quarters and nine months ended September 30, 2008 and 2007:

The Company has exposure to changes in foreign currency exchange rates resulting from transactions entered into by the Company and its foreign subsidiaries in currencies other than their local currency (primarily trade payables and receivables).  The Company is also exposed to currency risk on intercompany transactions (including intercompany loans).  The Company purchases foreign currency forward contracts to manage these transactional currency risks on a consolidated basis.

At September 30, 2008, the fair value of derivative instruments for foreign currency forward contracts result in assets and liabilities of $12 million and $3 million, respectively.  These fair values were measured based upon quoted prices for similar assets and liabilities in active markets.

14) ASSET RETIREMENT OBLIGATIONS

The Company’s asset retirement obligations include estimates for all asset retirement obligations identified for its worldwide facilities.  The Company’s asset retirement obligations are primarily the result of legal obligations for the removal of leasehold improvements and restoration of premises to their original condition upon termination of leases at approximately 30 facilities; legal obligations to close approximately 96 brine supply, brine disposal, waste disposal, and hazardous waste injection wells and the related pipelines at the end of their useful lives; and decommissioning and decontamination obligations that are legally required to be fulfilled upon closure of approximately 40 of the Company’s manufacturing facilities.

The following is a summary of the change in the carrying amount of the asset retirement obligations for the quarter and nine month periods ended September 30, 2008 and 2007 and the net book value of assets related to the asset retirement obligations at September 30, 2008 and 2007:

14

Table of Contents

At September 30, 2008, $4 million of the asset retirement obligation was included in accrued expenses and $19 million was included in other liabilities on the consolidated balance sheet.  At December 31, 2007, $13 million was included in accrued expenses and $13 million was included in other liabilities.

15) RESTRUCTURING ACTIVITIES

In the second quarter of 2007, the Company commenced a world-wide restructuring program to improve performance and growth, which included the realignment of its business segments, streamlining of the organization, reevaluation of its manufacturing footprint, the redirection of efforts to focus on end-use markets, and the closure of the antioxidant facilities at Pedrengo and Ravenna, Italy and two intermediate chemical product lines at Catenoy, France.  These programs were substantially completed as of December 31, 2007.  The Company recorded pre-tax charges of $2 million and $35 million for the nine months ended September 30, 2008 and 2007, respectively, mainly for severance related to these programs.

Additionally, the Company recorded pre-tax credits of $2 million during the first nine months of 2008 and $3 million during the first nine months of 2007 primarily related to the reversal of a portion of the reserve at its Tarrytown, NY facility due to a favorable change in the sublet agreement for space at that location.  During the first nine months of 2007, the Company recorded a pre-tax charge of $2 million related to its 2006 cost savings initiatives to support its continuing efforts to become more efficient and reduce costs.

A summary of the reserves for all the Company’s cost savings and restructuring programs are as follows:

At September 30, 2008, $7 million of the above reserves were included in accrued expenses and $1 million were included in other liabilities on the consolidated balance sheet.  At December 31, 2007, $27 million were included in accrued expenses and $2 million were included in other liabilities.

16) LEGAL MATTERS

ANTITRUST INVESTIGATIONS AND RELATED MATTERS

Rubber Chemicals

On May 27, 2004, the Company pled guilty to a one-count information charging the Company with participating in a combination and conspiracy to suppress and eliminate competition by maintaining and increasing the price of certain rubber chemicals sold in the United States and elsewhere during the period from July 1995 to December 2001. The U.S. federal court imposed a fine of $50 million, payable in six annual installments, without interest, beginning in 2004. In light of the Company’s cooperation with the U.S. Department of Justice (the “DOJ”), the court did not impose any period of corporate

15

Table of Contents

probation.  On May 28, 2004, the Company pled guilty to one count of conspiring to lessen competition unduly in the sale and marketing of certain rubber chemicals in Canada. The Canadian federal court imposed a sentence requiring the Company to pay a fine of CDN $9 million (approximately U.S. $7 million), payable in six annual installments, without interest, beginning in 2004. The Company paid (in U.S. dollars) $2 million in 2005, $7 million in 2006, $12 million in 2007 and $16 million in 2008.  Remaining cash payments for the US and Canadian fines are expected to be approximately $19 million in 2009.  At September 30, 2008, a reserve of $18 million related to these settlements has been included in accrued expenses on the Company’s consolidated balance sheet.  At December 31, 2007, reserves of $17 million and $17 million were included in accrued expenses and other liabilities, respectively.

European Union (“EU”) Investigations

The Company and certain of its subsidiaries are subjects of, and continue to cooperate in, an investigation being conducted by the European Commission (the “EC”) with respect to possible antitrust violations relating to the sale and marketing of various classes of heat stabilizers.  Such investigations concern anticompetitive practices, including price fixing and customer or market allocations, undertaken by the Company and such subsidiaries and certain of their officers and employees.  The Company and its subsidiaries that are subject to the investigations have received from the EC written assurances of conditional amnesty with respect to certain classes of heat stabilizers. The assurances of amnesty are conditioned upon several factors, including continued cooperation with the EC. The Company is actively cooperating with the EC regarding the heat stabilizer investigation.

Civil Lawsuits

The actions described below under “U.S. Civil Antitrust Actions” are in various procedural stages of litigation.  Although the actions described below have not had a material adverse impact on the Company, we cannot predict the outcome of any of those actions. The Company will seek cost-effective resolutions of the various pending and threatened legal proceedings against the Company; however, the resolution of any civil claims now pending or hereafter asserted against the Company or any of its subsidiaries could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.  The Company has established reserves for all direct and indirect purchaser claims as of September 30, 2008.

The Company reviews its reserves for civil lawsuits on a quarterly basis.  The Company also adjusts its reserves quarterly to reflect its current best estimates.

U.S. Civil Antitrust Actions

Direct and Indirect Purchaser Lawsuits. The Company, individually or together with its subsidiary Uniroyal Chemical Company, Inc., now merged into Chemtura Corporation (referred to as “Uniroyal” for the purposes of the description of the Company’s lawsuits), and other companies, are defendants in various proceedings filed in state and federal courts, described below.

Federal Lawsuits.  The Company and certain of its subsidiaries continues to be a defendant in two lawsuits pending in the federal courts.  One of these suits is a Massachusetts indirect purchaser claim premised upon violations of state law.  The suit was originally filed in Massachusetts state court in May 2005 as an indirect purchaser action, and was subsequently removed to the United States District Court, District of Massachusetts.  The complaint initially related to purchases of any product containing rubber and urethane products, defined to include EPDM, nitrile rubber and urethanes, but is now limited to urethanes only.  On September 12, 2008, the Company received final court approval of a settlement agreement covering this action.  The other suit, described separately below under the sub-heading “Bandag” was originally filed as a direct purchaser suit on June 29, 2006 in the United States District Court, Middle District of Tennessee and was subsequently transferred to the United States District Court, Northern District of California.  In both of these actions, and in all actions pending in state courts (further described below), the plaintiffs seek, among other things, treble damages, costs (including attorneys’ fees) and injunctive relief preventing further violations or the improper conduct alleged in the complaint.  Neither of these federal suits is expected to have a material adverse effect on the Company.

Bandag.  This suit was originally brought by Bridgestone Americas Holding, Inc, Bridgestone Firestone North American Tire, LLC, and Pirelli Tire, LLC (all of whom have since settled) along with the remaining plaintiff, Bandag Incorporated (n/k/a/ Bridgestone Bandag, LLC), with respect to purchases of rubber chemicals from the Company, Uniroyal and several of the world-wide leading suppliers of rubber chemicals.  This suit alleges that the Company and Uniroyal, along with other rubber chemical manufacturers conspired to fix the prices of the rubber chemicals, and to divide the rubber chemicals markets in violation of Section 1 of the Sherman Act.  Bandag Incorporated, a designer and manufacturer of tire re-treading, directly purchased from the Company and from the other defendants to this suit, and in doing so, claims to have paid artificially inflated prices for rubber chemicals. Bandag has requested treble damages, costs (including attorneys’ fees) and such other relief as the court may deem appropriate.  The Company has agreed to utilize a litigated and binding arbitration to try the claims at issue in this action.

16

Table of Contents

State Lawsuits. The Company, individually or together with Uniroyal, also continues to be a defendant in certain indirect purchaser antitrust class action lawsuits filed in state courts involving the sale of urethanes and urethane chemicals.  The complaints in these actions principally allege that the defendants conspired to fix, raise, maintain or stabilize prices for urethanes and urethane chemicals, sold in the United States in violation of certain antitrust statutes and consumer protection and unfair or deceptive practices laws of the relevant jurisdictions and that this caused injury to the plaintiffs who paid artificially inflated prices for such products as a result of such alleged anticompetitive activities.  There are currently 16 state complaints pending.  On September 12, 2008, the Company received final court approval of a settlement agreement covering 4 of these actions.  In addition, the Company has reached a settlement agreement covering the remaining 12 complaints, all of which are pending in a coordinated proceeding in the Superior Court of the State of California for the County of San Francisco.  None of these state lawsuits individually or in the aggregate are expected to have a material adverse effect on the Company.

Australian Civil Antitrust Matters

On September 27, 2007, the Company was sued in the Federal Court of Australia for alleged price fixing violations with respect to the sale of rubber chemicals in Australia.  The Company has not yet responded to the complaint, nor at this early stage, assessed its merits.  On October 10, 2008, the Federal Court of Australia rendered a decision in which the applicant’s Statement of Claim was struck.  The applicant was given until November 21, 2008 to file a further Statement of Claim.  The Company does not expect this matter will be material.

Federal Securities Class Action

The Company, certain of its former officers and directors (the “Crompton Individual Defendants”), and certain former directors of the Company’s predecessor Witco Corp. are defendants in a consolidated class action lawsuit, filed on July 20, 2004, in the United States District Court, District of Connecticut, brought by plaintiffs on behalf of themselves and a class consisting of all purchasers or acquirers of the Company’s stock between October 1998 and October 2002. The consolidated amended complaint principally alleges that the Company and the Crompton Individual Defendants caused the Company to issue false and misleading statements that violated the federal securities laws by reporting inflated financial results resulting from an alleged illegal, undisclosed price-fixing conspiracy. The putative class includes former Witco Corp. shareholders who acquired their securities in the Crompton-Witco merger pursuant to a registration statement that allegedly contained misstated financial results.  The complaint asserts claims against the Company and the Crompton Individual Defendants under Section 11 of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder.  Plaintiffs also assert claims for control person liability under Section 15 of the Securities Act of 1933 and Section 20 of the Securities Exchange Act of 1934 against the Crompton Individual Defendants. The complaint also asserts claims for breach of fiduciary duty against certain former directors of Witco Corp. for actions they allegedly took as Witco Corp. directors in connection with the Crompton-Witco merger. The plaintiffs seek, among other things, unspecified damages, interest, and attorneys’ fees and costs. The Company and the Crompton Individual Defendants filed a motion to dismiss on September 17, 2004, which is now fully briefed and pending. The former directors of Witco Corp. filed a motion to dismiss in February 2005, which is pending. On July 22, 2005, the court granted a motion by the Company and the Crompton Individual Defendants to stay discovery in the related Connecticut shareholder derivative lawsuit (described below under “Shareholder Derivative Lawsuit”), pending resolution of the motion to dismiss by the Company and Crompton Individual Defendants.  On April 30, 2008, the parties entered a memorandum of understanding to settle the litigation.  Under the proposed settlement, defendants will pay or cause to be paid $21 million and deny any wrongdoing or liability.  The settlement’s terms are being finalized by the parties.

Shareholder Derivative Lawsuit

Certain current directors and one former director and officer of the Company (the “Individual Defendants”) are defendants in a shareholder derivative lawsuit filed on August 25, 2003 in Connecticut state court, nominally brought on behalf of the Company. The Company is a nominal defendant in the lawsuit. The plaintiff filed an amended complaint on November 19, 2004. The amended complaint principally alleges that the Individual Defendants breached their fiduciary duties by causing or allowing the Company to issue false and misleading financial statements by inflating financial results resulting from an alleged illegal, undisclosed price-fixing conspiracy. The plaintiff contends that this wrongful conduct caused the Company’s financial results to be inflated, cost the Company its credibility in the marketplace and market share, and has and will continue to cost the Company millions of dollars in investigative and legal fees. The plaintiff seeks, among other things, compensatory and punitive damages against the director defendants in unspecified amounts, prejudgment interest, and attorneys’ fees and costs. The Company filed a motion to strike all counts of the complaint on January 12, 2005 for failure to allege adequately that a pre-lawsuit demand on the Company’s Board of Directors by the plaintiff would have been futile and was thus excused.  This motion was subsequently denied by the court.  Discovery in this lawsuit has been stayed by the United States District Court, District of Connecticut, pending resolution of the motion to dismiss filed by Company’s and the Crompton Individual Defendants in the related consolidated securities class action lawsuit described above under “Federal Securities Class Action.”  On July 25, 2008, the plaintiff filed a motion in the District of Connecticut seeking to lift the federal court’s discovery stay.

17

Table of Contents

Reserves

At September 30, 2008 and December 31, 2007, the Company had a remaining reserve of $29 million and $43 million, respectively, included in accrued expenses on its consolidated balance sheets relating to the remaining U.S. direct and indirect purchaser lawsuits, the federal securities class action lawsuit described under “Federal Securities Class Action” and the shareholder derivative lawsuit described under “Shareholder Derivative Lawsuit.”  These reserves cover all direct and indirect purchaser antitrust claims.  The Company periodically reviews its accruals as additional information becomes available, and may adjust its accruals based on actual settlement offers and other later occurring events.  The Company is unable to estimate the reasonably possible loss, if any, in excess of the accrual as none of these claims have been reduced to judgment.

The reserve activity for antitrust related litigation is summarized as follows: