SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the transition period from                              to                             

 

(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 or a non-accelerated filed. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

 

Large Accelerated Filer x

Accelerated Filer o

Non-accelerated filer o

 

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

 

 

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

 

 

CHEMTURA CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007

 

			INDEX			PAGE
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements and Accompanying Notes
		Consolidated Statements of Operations (Unaudited) — Quarter ended March 31, 2007 and 2006				2
		Consolidated Balance Sheets — March 31, 2007 (Unaudited) and December 31, 2006				3
		Condensed Consolidated Statements of Cash Flows (Unaudited) — Quarter ended March 31, 2007 and 2006				4
		Notes to Consolidated Financial Statements (Unaudited)				5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations				28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk				37
Item 4.		Controls and Procedures				38
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings				39
Item 1A.		Risk Factors				45
Item 4.		Submission of Matters to a Vote of Security Holders				46
Item 6.		Exhibits				47
		Signatures				48

 

1

 

PART I.   FINANCIAL INFORMATION

ITEM 1.   Financial Statements and Accompanying Notes

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

Quarter ended March 31, 2007 and 2006

(In thousands, except per share data)

 

		Quarter ended March 31,
		2007			2006
Net sales		$	955,005		$	915,761
Cost of products sold		732,891			674,837
Selling, general and administrative		106,299			100,793
Depreciation and amortization		65,316			51,711
Research and development		17,024			14,798
Facility closures, severance and related costs		2,558			504
Antitrust costs		12,294			12,808
Merger costs		351			10,045
Equity income		(575		)	(274		)
Operating profit		18,847			50,539
Interest expense		23,356			29,073
Other (income) expense, net		(1,930		)	1,530
(Loss) earnings from continuing operations before income taxes		(2,579		)	19,936
Income tax expense		12,904			6,731
(Loss) earnings from continuing operations		(15,483		)	13,205
Gain on sale of discontinued operations		2,458			—
Net (loss) earnings		$	(13,025	)	$	13,205
Basic earnings (loss) per common share:
(Loss) earnings from continuing operations		$	(0.06	)	$	0.05
Gain on sale of discontinued operations		0.01			—
Net (loss) earnings		$	(0.05	)	$	0.05
Diluted earnings (loss) per common share:
(Loss) earnings from continuing operations		$	(0.06	)	$	0.05
Gain on sale of discontinued operations		0.01			—
Net (loss) earnings		$	(0.05	)	$	0.05
Dividends per common share		$	0.05		$	0.05

 

See accompanying notes to consolidated financial statements.

 

2

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

March 31, 2007 (Unaudited) and December 31, 2006

(In thousands, except per share data)

 

		March 31,			December 31,
		2007			2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	92,222		$	95,113
Accounts receivable		419,975			342,141
Inventories		732,363			660,408
Other current assets		148,478			288,128
Total current assets		1,393,038			1,385,790
NON-CURRENT ASSETS
Property, plant and equipment		1,142,300			1,147,233
Cost in excess of acquired net assets		1,249,511			1,176,809
Intangible assets, net		579,092			550,705
Other assets		159,405			138,869
		$	4,523,346		$	4,399,406
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term borrowings		$	27,238		$	48,118
Accounts payable		309,331			284,637
Accrued expenses		361,361			460,996
Income taxes payable		38,605			94,225
Total current liabilities		736,535			887,976
NON-CURRENT LIABILITIES
Long-term debt		1,301,534			1,063,360
Pension and post-retirement health care liabilities		438,757			439,924
Other liabilities		375,855			329,242
STOCKHOLDERS’ EQUITY
Common stock — $.01 par value
Authorized — 500,000 shares
Issued — 252,713 shares at March 31, 2007 and 252,280 shares at December 31, 2006		2,527			2,522
Additional paid-in capital		3,012,775			3,005,101
Accumulated deficit		(1,152,833		)	(1,127,870		)
Accumulated other comprehensive loss		(24,962		)	(34,007		)
Treasury stock at cost — 11,490 shares		(166,842		)	(166,842		)
Total stockholders’ equity		1,670,665			1,678,904
		$	4,523,346		$	4,399,406

 

See accompanying notes to consolidated financial statements.

 

3

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Quarter ended March 31, 2007 and 2006

(In thousands)

 

		Quarter ended March 31,
Increase (decrease) in cash		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings		$	(13,025	)	$	13,205
Adjustments to reconcile net (loss) earnings to net cash used in operations:
Gain on sale of discontinued operations		(2,458		)	—
Depreciation and amortization		65,316			51,711
Stock-based compensation expense		3,124			3,579
Equity income		(575		)	(371		)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
Accounts receivable		(95,723		)	(102,272		)
Accounts receivable — securitization		48,105			57,161
Inventories		(30,975		)	(29,412		)
Accounts payable		11,465			(3,440		)
Pension and post-retirement health care liabilities		(3,656		)	(5,733		)
Other		(12,760		)	(56,666		)
Net cash used in operations		(31,162		)	(72,238		)
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from divestments		—			19,390
Payments for acquisitions, net of cash acquired		(159,601		)	(6,733		)
Merger transaction costs paid		(301		)	(4,737		)
Capital expenditures		(20,113		)	(17,562		)
Net cash used in investing activities		(180,015		)	(9,642		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility		240,000			86,993
Proceeds from long-term borrowings		348			—
(Payments on) proceeds from short-term borrowings		(21,801		)	5,844
Dividends paid		(12,059		)	(12,007		)
Proceeds from exercise of stock options		1,634			848
Other financing activities		(598		)	433
Net cash provided by financing activities		207,524			82,111
CASH AND CASH EQUIVALENTS
Effect of exchange rates on cash and cash equivalents		762			2,503
Change in cash and cash equivalents		(2,891		)	2,734
Cash and cash equivalents at beginning of period		95,113			138,556
Cash and cash equivalents at end of period		$	92,222		$	141,290

 

See accompanying notes to consolidated financial statements.

4

 

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 ended March 31, 2007 and March 31, 2006 is unaudited, but reflect 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 financial information and note disclosures included in the annual financial statements have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q.  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 2006 Annual Report on Form 10-K.  The consolidated results of operations for the quarter ended March 31, 2007 are not necessarily indicative of the results expected for the full year.

Accounting Policies

Operating Costs and Expenses

Cost of products sold includes all costs incurred in manufacturing products, including raw materials, direct manufacturing costs and manufacturing overhead.  Cost of products sold 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 expense (SG&A) includes costs and expenses related to the following functions and activities: selling, advertising, information technology, legal, provision for doubtful accounts, corporate facilities and corporate administration.  SG&A also includes accounting, finance and human resources, excluding direct support in manufacturing operations, which is included as cost of products sold.  Research and development expenses (R&D) include basic and applied research and development activities of a technical and non-routine nature.  R&D costs are expensed as incurred.  Costs of products sold, 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) expenses, net

The following table is a summary of items included in the other (income) expense, net line in the consolidated statements of operations for all periods presented.

 

 

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Pension and other post-retirement benefits of legacy Witco plans represents the accretion of interest on obligations assumed in connection with the purchase of Witco in 1999 relating to businesses for which the Company and the plan participants did not have any continuing involvement either prior or subsequent to the acquisition.

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 March 31, 2007 and December 31, 2006 are $0.8 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 accounts receivable are allowances for doubtful accounts of $32.3 million and $32.1 million at March 31, 2007 and December 31, 2006, respectively.

Depreciation expense amounted to $55.6 million and $40.4 million for the three months ended March 31, 2007 and 2006, respectively.  Depreciation expense includes accelerated depreciation due to the change in useful life of certain fixed assets at several of the Company’s manufacturing facilities of $13.8 million and $2.9 million for the three months ended March 31, 2007 and 2006, respectively.

During the first three months of 2007 and 2006, the Company made interest payments of approximately $23.4 million and $42.7 million, respectively.  The decrease was primarily due to early retirement of the Senior Floating Rate Notes due 2010 in May 2006 and the 9.875% Senior Notes due 2012 in July 2006. During the first three months of 2007 and 2006, the Company made payments for income taxes (net of refunds) of $17.4 million and $27.0 million, respectively.  The first quarter of 2007 includes a gain on sale of discontinued operations of $2.5 million (net of income taxes of $1.2 million), arising from additional contingent earn-out proceeds related to the OrganoSilicones business that was sold in 2003.

ACCOUNTING DEVELOPMENTS

Implemented in 2007

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140.”  Statement No. 156 provides additional guidance for initially recognizing servicing assets and liabilities at fair value, if practical and is effective for fiscal years beginning after September 15, 2006.  The adoption of Statement No. 156 did not have a material impact on the Company’s consolidated results of operations for the three months ended March 31, 2007 and financial position as of March 31, 2007.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”).  The Interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. See Note 10, “Income Taxes” for information relating to implementation of this interpretation.

Future Implementations

In September 2006, the FASB issued Statement No. 157 “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The provisions of Statement No. 157 are effective as of the beginning of the Company’s 2008 fiscal year.  The Company is assessing the impact of adopting Statement No. 157 on its financial position and results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value in an attempt to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently.  The Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  The Company is currently assessing the impact on its financial position and its results of operations.

6

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2) COMPREHENSIVE (LOSS) INCOME

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

				Quarter ended March 31,
(In thousands)				2007			2006
Net (loss) earnings				$	(13,025	)	$	13,205
Other comprehensive income
Foreign currency translation adjustments				2,285			17,986
Unrecognized pension and other post retirement benefit costs (net of tax)				273			—
Change in fair value of derivatives (net of tax)				6,487			(8,156		)
Other				—			64
Comprehensive (loss) income				$	(3,980	)	$	23,099

 

The components of accumulated other comprehensive loss at March 31, 2007 and December 31, 2006 are as follows:         

 

				March 31,			December 31,
(In thousands)				2007			2006
Foreign currency translation adjustment				$	108,884		$	106,599
Unrecognized pension and other post retirement benefit costs (net of tax)				(133,600		)	(133,873		)
Fair value of derivatives (net of tax)				(269		)	(6,756		)
Other				23			23
Accumulated other comprehensive loss				$	(24,962	)	$	(34,007	)

 

Reclassifications from other comprehensive loss to earnings related to the Company’s natural gas price swap contracts aggregated to $4.6 million pre-tax loss and $3.5 million pre-tax gain during the quarter ended March 31, 2007 and 2006, respectively.

 

3) FACILITY CLOSURES, SEVERANCE AND RELATED COSTS

On April 4, 2007, the Company announced that it is implementing an industry-based business model in order to improve performance and accelerate growth.  The Company intends to realign its business segments, streamline its organization and redirect its efforts to focus on end-use markets.  This restructuring plan is expected to result in a reduction of the Company’s global workforce by approximately 10%.  As a result of this plan, the Company recorded a pre-tax charge for severance of $1.7 million to facility closures, severance and related costs in the consolidated statement of operations in the first quarter of 2007.  Additional severance related charges will occur in the second quarter of 2007 as a result of the announced plan.  The Company is continuing to evaluate its workforce and operating facilities and additional restructuring charges may result.

In 2006, the Company implemented cost savings initiatives to support its continuing efforts to become more efficient and reduce costs.  As a result of these initiatives, the Company recorded a pre-tax charge of $0.9 million during the first quarter of 2007 and $1.6 million during the first quarter of 2006.  The pre-tax charge for the full year of 2006 was $10.7 million.  These charges were primarily for severance costs related to facility closures and employee reductions at several of the Company’s manufacturing and research and development facilities around the world.

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

 

 

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The Company has included $14.3 million and $12.6 million of the above reserves in accrued expenses at March 31, 2007 and December 31, 2006, respectively, and $5.7 million and $6.2 million, respectively, in other liabilities in its consolidated balance sheets.

4) MERGERS ACQUISITIONS AND DIVESTITURES

Kaufman Acquisition

On January 31, 2007, the Company completed the acquisition of the stock of Kaufman Holdings Corporation (“Kaufman”) for $159.6 million plus an additional $4.1 million for working capital adjustments.  Additionally, a deferred payment of $5.0 million will be paid to the sellers on the second anniversary of the closing date subject to any indemnification claims.

The acquired assets and assumed liabilities have been recorded at their fair value and the excess cost of the acquired net assets over their fair value has been recorded as goodwill.  The total purchase price has been allocated to the acquired net tangible and intangible assets and assumed liabilities based upon valuations and estimates of fair value.  The valuations and estimates utilized to determine the purchase price allocation are preliminary and subject to change.  The purchase price has been primarily allocated as follows:

 

Kaufman had net sales of $205.1 million in 2006.  The Kaufman acquisition complements the Company’s existing Petroleum Additives segment in that it offers related products in key customer areas, providing the opportunity to strengthen alliances with major suppliers, and may offer potential distribution synergies.

Great Lakes Merger

Effective July 1, 2005, the Company and Great Lakes Chemical Corporation completed an all-stock merger transaction (the “Merger”).  As of December 31, 2006, the Company had substantially completed all its merger integration efforts.

As a result of the Merger, the Company recorded charges for costs directly related to the Merger as a component of operating profit.  The Company recorded $0.4 million and $10.0 million of merger costs during the quarter ended March 31, 2007 and 2006, respectively, primarily for relocation and consulting costs related to the integration of the two companies.

EPDM Divestiture

On February 3, 2007, the Company signed an asset purchase agreement to sell its EPDM business and portions of its Rubber Chemical business to an affiliate of Lion Chemical Capital, LLC.  The transaction is expected to close in the second quarter of 2007 and is subject to certain conditions, including regulatory approvals, financing and a financial audit.

5) ACCOUNTS RECEIVABLE PROGRAMS

The Company has a domestic accounts receivable securitization program to provide funding for up to $275 million of domestic receivables to agent banks.  Accounts receivable sold under this program were $171.8 million and $140.5 million as of March 31, 2007 and December 31, 2006 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 $160.3 million and $143.0 million as of March 31, 2007 and December 31, 2006, 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 $206.9 million of their eligible accounts receivable to an agent bank as of March 31, 2007. International accounts receivable sold under this program

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were $155.7 million and $139 million as of March 31, 2007 and December 31, 2006, 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 $5.5 million and $2.1 million for the three months ended March 31, 2007 and 2006, 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.

6) INVENTORIES

Components of inventories are as follows:

 

 

Included in the above net inventory balances are inventory obsolescence reserves of approximately $53.0 million at both March 31, 2007 and December 31, 2006.

7) PROPERTY, PLANT AND EQUIPMENT

 

 

8) GOODWILL AND INTANGIBLE ASSETS

Goodwill by reportable segment is as follows:

(In thousands)				December 31, 2006			Kaufman  Acquisition			Adoption of FIN 48			Great Lakes Acquisition Tax Adjustment			Foreign  Currency Translation			March 31, 2007
Plastic Additives				$	419,014		$	—		$	(2,422	)	$	(831	)	$	68		$	415,829
Polymers				47,055			—			—			—			(1		)	47,054
Specialty Additives				61,543			83,178			(173		)	(59		)	161			144,650
Crop Protection				95,311			—			(266		)	(92		)	9			94,962
Consumer Products				553,886			—			(4,761		)	(1,634		)	(475		)	547,016
				$	1,176,809		$	83,178		$	(7,622	)	$	(2,616	)	$	(238	)	$	1,249,511

 

The increase in goodwill since December 31, 2006 is primarily due to the acquisition of Kaufman Holdings Corporation on January 31, 2007, partially offset by the implementation of FIN 48 (see Note 10 — Income Taxes in the Notes to Consolidated Financial Statements) and a pre-merger tax adjustment to reverse a valuation allowance related to former Great Lakes entities.

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 value of a reporting unit below its carrying value.

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

 

 

The increase in intangible assets since December 31, 2006 is primarily due to the acquisition of Kaufman Holdings Corporation on January 31, 2007.

Amortization expense related to intangible assets (excluding equity investments) amounted to $9.3 million for the quarter ended March 31, 2007 and decreased slightly from $9.7 million for the quarter ended March 31, 2006.  Estimated amortization expense of intangible assets (excluding equity investments) as of March 31, 2007 for the next five fiscal years is as follows: $39 million (2007), $38 million (2008), $36 million (2009), $32 million (2010) and $32 million (2011).

9) INDEBTEDNESS

The Company has a $740 million credit facility with the ability to expand up to $750 million.  At March 31, 2007, borrowings under the credit facility were $240 million.  There were no borrowings under the credit facility at December 31, 2006.  The increase in borrowings was primarily to fund the acquisition of Kaufman and growth in working capital in the quarter.

In February 2007, amendments were made to the interest coverage ratio and leverage ratio for the quarterly periods March 31, 2007 through September 30, 2007.  The Company was in compliance with the covenants of its various debt agreements at March 31, 2007 and anticipates compliance in the future.

10) INCOME TAXES

The Company reported an income tax expense from continuing operations for the first quarter ended March 31, 2007 and March 31, 2006 of $12.9 million and $6.7 million, respectively.  The increase in the provision for income taxes is principally attributable to the Company not recognizing tax benefits of $15.2 million associated with the Company’s year to date domestic net operating loss because it is not more likely than not that those tax benefits will be realized during the year.

The Company adopted the provisions of FIN 48 on January 1, 2007.  The total amount of unrecognized tax benefits as of the date of adoption was $60.0 million.  As a result of the implementation of FIN 48, the Company recognized a $1.4 million decrease in the income taxes payable liability for unrecognized tax benefits which was accounted for as follows:

 

Included in the balance of unrecognized tax benefits at January 1, 2007, are $43.6 million of tax benefits that, if recognized, would affect the effective tax rate.  Also included in the balance of unrecognized tax benefits at January 1, 2007, are $16.4 million of tax benefits that, if recognized, would result in a decrease to goodwill recorded in purchase business combinations.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in its provision for income tax expense.  Upon adoption of FIN 48, the Company had accrued interest and penalties related to unrecognized tax benefits of $4.1 million.

10

 

In January of 2006, the Internal Revenue Service completed an examination of the Company’s corporate income tax returns for tax years 2002 and 2003.  The Company challenged two adjustments from the final Revenue Agent’s Report and requested a review at the Internal Revenue Service Appellate level.  These issues were resolved at Appeals in December 2006 and the Company is waiting for final approval at the Joint Committee.  Accordingly, the US federal statute of limitations remains open for the year 2002 onward.  Examinations are currently in process with the Internal Revenue Service for tax years 2004 and 2005.

Foreign and US state jurisdictions have statutes of limitations generally ranging from 3 to 5 years.  The Company has a number of state, local and foreign examinations currently in process.  Major foreign examinations in process include Belgium (2004 onward), Canada (2001 onward) and the United Kingdom (2004 onward). The Company has considered the uncertain positions associated with the examinations in process during the implementation of FIN 48.

The Company expects that the amount of unrecognized tax benefits will continue to change in the next twelve months as a result of ongoing tax deductions, the outcomes of audits and the passing of the statute of limitations, but that these changes are not expected to have a significant impact on the results of operations or the financial position of the Company.

11) 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 quarter ended March 31, 2007 since the common stock equivalents (in thousands) of 1,097 were antidilutive.

The following is a reconciliation of the shares used in the computations:

 

 

The Company’s outstanding stock options (in thousands) of 8,122 and 6,929 at March 31, 2007 and 2006, 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, and therefore, the inclusion would have been antidilutive.  These options could be dilutive if the average share price increases and is greater than the exercise price of these options.  Company performance-based restricted shares (in thousands) of 1,719 and 1,572 at March 31, 2007 and 2006, 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.

12) STOCK-BASED COMPENSATION    

Effective January 1, 2006, the Company adopted the provisions of FASB Statement 123 (revised 2004) “Share-Based Payment”.   Stock-based compensation expense, including amounts for restricted stock and options, was $3.1 million and $3.6 million for the three month periods ended March 31, 2007 and 2006, respectively.  In 2007, stock-based compensation is presented 63% in SG&A, 34% in cost of products sold and 3% in R&D.

Stock Option Plans

In February 2007, the Company’s Board of Directors approved the grant of options covering 1,714,500 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 March 31, 2007 and 2006 was $5.45 and $4.85, respectively.

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The Black-Scholes option-pricing model requires the use of various assumptions.  The following table presents the weighted average assumptions used:

 

Stock option plan activity for the quarter ended March 31, 2007 is as follows:

		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value (in millions)
Options outstanding, January 1, 2007		15,234,788		$	11.77		5.1		$	12.4
Granted		1,714,500		12.06
Exercised		(154,878	)	8.34					$	0.5
Canceled or expired		(573,414	)	13.06
Options outstanding, March 31, 2007		16,220,996		$	11.79		5.2		$	20.8
Options exercisable, March 31, 2007		12,883,149		$	11.82		4.2		$	20.6

 

Total remaining unrecognized compensation cost associated with unvested stock options at March 31, 2007 was $12.4 million, which will be recognized over the weighted average period of approximately one year.

Restricted Stock Plans

In February 2007, the Board of Directors granted long-term incentive awards in the amount of 142,000 shares of restricted stock, which will vest three and a half years from the date of grant.

In February 2007, 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 2007, 2008 and 2009 cumulative earnings before interest, taxes, depreciation and amortization (EBITDA).  Results of EBITDA will be adjusted for non-GAAP factors as defined.  The awards are for a maximum of 505,650 shares.  Shares awards based upon the achievement of the performance milestones will become vested and distributed on February 1, 2010.

Additionally, in February 2007, grants of 55,971 shares, of restricted stock to non-employee directors of the Chemtura Board of Directors were approved.  The grants of shares do not contain market condition requirements and vest upon retirement from the Board.

The fair value of restricted stock awards without market conditions is determined based on the number of shares granted and the quoted closing price of the Company’s stock at the date of grant.

Restricted stock award activity for the quarter ended March 31, 2007 is as follows:

 

 

Total remaining unrecognized compensation cost associated with unvested restricted stock awards at March 31, 2007 was $9.3 million, which will be recognized over the weighted average period of approximately one year.

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Cash proceeds received from option exercises for the quarter ended March 31, 2007 and 2006 were $1.6 million and $0.8 million, respectively.

 

13) PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

Components of net periodic benefit cost (credit) for the quarter ended March 31, 2007 and 2006 are as follows:

 

				Defined Benefit Plans
				Qualified						International and						Post-Retirement
				Domestic Plans						Non-Qualified Plans						Health Care Plans
				Quarter ended March 31,						Quarter ended March 31,						Quarter ended March 31,
(In thousands)				2007			2006			2007			2006			2007			2006
Service cost				$	359		$	180		$	1,963		$	1,862		$	288		$	312
Interest cost				11,347			11,850			6,217			5,091			2,562			2,584
Expected return on plan assets				(15,494		)	(14,580		)	(4,941		)	(3,609		)	(604		)	(594		)
Amortization of:
Prior service cost				37			—			26			148			(915		)	(806		)
Transition obligation				—			—			28			28			—			—
Unrecognized losses				1,341			1,703			931			598			607			402
Curtailment gain				—			—			—			(429		)	—			—
Settlement gain				—			—			—			(221		)	—			—
Net periodic benefit cost (credit)				$	(2,410	)	$	(847	)	$	4,224		$	3,468		$	1,938		$	1,898

 

The Company expects to contribute approximately $24.5 million and $14.6 million to its international and non-qualified pension plans and post-retirement health care plans in 2007, respectively.   No contribution is required to its qualified domestic plans.  During the first quarter of 2007, the Company made discretionary contributions of $0.7 million to its international plans.  The Company’s funding assumptions for 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.

During the first quarter of 2006, the Company made a lump sum payment under the provisions of its supplemental executive retirement programs of approximately $2.7 million.  As a result of the first quarter 2006 payment, a settlement gain of approximately $0.2 million was recorded.

14) 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. The Company’s hedge contracts cover a gradually decreasing percentage of its purchase requirements over a rolling three-year period.  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 products sold.

The following table summarizes the unrealized (gains) and losses related to certain cash flow hedging for the quarter ended March 31, 2007 and 2006.

 

15) 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 34 facilities, legal obligations to close approximately 99 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

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obligations that are legally required to be fulfilled upon closure of approximately 36 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 ended March 31, 2007 and 2006, and the net book value of assets related to the asset retirement obligations and the related depreciation at March 31, 2007 and 2006.

				Quarter ended March 31,
(In thousands)				2007			2006
Asset retirement obligation balance at beginning of period				$	24,100		$	10,560
Accretion expense — cost of products sold				3,642			83
Accretion expense — selling, general and administrative				12			—
Revisions to accruals				108			—
Payments				(1,369		)	—
Foreign currency translation				16			—
Asset retirement obligation balance at end of period				$	26,509		$	10,643
Net book value of asset retirement obligation assets at end of period				$	1,421		$	1,566
Depreciation expense				$	388		$	18

 

The increase in the asset retirement obligation from March 31, 2006 to March 31, 2007 is primarily due to the acceleration of the recognition of the asset retirement obligations for several of the Company’s manufacturing facilities due to revisions to their estimated closure dates.

At March 31, 2007, $13.7 million of the asset retirement obligation was included in accrued expenses and $12.8 million was included in other liabilities on the consolidated balance sheet.  At December 31, 2006, $11.3 million was included in accrued expenses and $12.8 million was included in other liabilities.

16) LEGAL MATTERS

Antitrust Investigations

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 $50.0 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 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 $9.0 million (approximately U.S. $7 million), payable in six annual installments, without interest, beginning in 2004. The Company paid (in U.S. dollars) $2.3 million in 2004, $2.3 million in 2005, and $7.0 million in 2006 in cash, for the U.S. and Canadian fines. Remaining cash payments for the U.S. and Canadian fines are expected to equal (in U.S. dollars) approximately $11.6 million in 2007; $16.2 million in 2008; and $18.5 million in 2009.  At March 31, 2007 reserves of $11.5 million and $31.5 million related to these settlements have been included in accrued expenses and other liabilities, respectively, on the Company’s consolidated balance sheet.  At December 31, 2006 reserves of $11.6 million and $30.9 million were included in accrued expenses and other liabilities, respectively.

Other Product Areas

The Company and certain of its subsidiaries are subjects of, and continue to cooperate in, coordinated criminal and civil investigations being conducted by the DOJ, the Canadian Competition Bureau and the European Commission (the “EC”) (collectively, the “Governmental Authorities”) with respect to possible antitrust violations relating to the sale and marketing of certain other products.  The Governmental Authorities are each conducting investigations with respect to various classes of heat stabilizers; nitrile rubber; and, in the case of the DOJ and the Canadian Competition Bureau, urethanes and urethane chemicals.  Such investigations concern anticompetitive practices, including price fixing and customer or market allocations,

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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 each of the Governmental Authorities verbal or written assurances of conditional amnesty from prosecution and fines. The EC has granted conditional amnesty with respect to certain classes of heat stabilizers.  The assurances of amnesty are conditioned upon several factors, including continued cooperation with the Governmental Authorities. The Company is actively cooperating with the Governmental Authorities regarding such investigations.

Internal Investigation

The Company has completed its internal investigation of the Company’s business and products to determine compliance with applicable antitrust law and with the Company’s antitrust guidelines and policies. During the course of its internal investigation, the Company strengthened its training and compliance programs and took certain actions with respect to certain employees, including termination of employment and other disciplinary actions.

Impact upon the Company

The Company does not expect the previously described resolution of the rubber chemicals investigations by the United States, Canada and the EC to have a material adverse effect on its future results of operations.  However, the resolution of any other possible antitrust violations against the Company and certain of its subsidiaries and the resolution of any civil claims now pending or hereafter asserted against them may have a material adverse effect on the Company’s financial condition, results of operations, cash flows or prospects. No assurances can be given regarding the outcome or timing of these matters.

Civil Lawsuits

Except for those actions indicated as being subject to a settlement agreement, dismissed by the applicable court or as otherwise provided, the actions described below under “U.S. Civil Antitrust Actions” and “Canadian 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 March 31, 2007.

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.  The Company increased its reserves during the first quarter of 2007 to reflect the increase in actual settlement offers and settlements in the direct and indirect purchaser lawsuits described below.

U.S. Civil Antitrust Actions

Partially Terminated Global Settlement Agreement. On January 11, 2005, the Company and plaintiff class representatives entered into a Settlement Agreement (the “Global Settlement Agreement”) that was intended to resolve, with respect to the Company, three consolidated direct purchaser class action lawsuits filed against the Company, its subsidiary Uniroyal Chemical Company, Inc., now known as Chemtura USA Corporation (referred to as “Uniroyal” for purposes of the description of the Company’s civil lawsuits), and other companies, by plaintiffs on behalf of themselves and classes consisting of all persons or entities who purchased EPDM, nitrile rubber and rubber chemicals, respectively, in the United States directly from one or more of the defendants or any predecessor, parent, subsidiary or affiliates thereof, at any time during various periods, with the earliest commencing on January 1, 1995. The complaints in the consolidated actions principally alleged that the defendants conspired to fix, raise, maintain or stabilize prices for EPDM, nitrile rubber and rubber chemicals, as applicable, sold in the United States in violation of Section 1 of the Sherman Act and that this caused injury to the plaintiffs who paid artificially inflated prices for such products as a result of such alleged anticompetitive activities.  The Global Settlement Agreement provided that the Company would pay a total of $97.0 million, consisting of $62.0 million with respect to rubber chemicals, $30.0 million with respect to EPDM and $5.0 million with respect to nitrile rubber, in exchange for the final dismissal with prejudice of the foregoing three lawsuits as to the Company and a complete release of all claims against the Company set forth in the lawsuits.

In accordance with its rights under the Global Settlement Agreement, the Company terminated those parts of the settlement covering rubber chemicals and EPDM following the exercise of opt out rights by certain potential members of the applicable classes.  With respect to the EPDM portion of the claims a settlement was reached on January 22, 2007, which settlement is subject to court approval and permits potential class members to opt out of the class.  With respect to the rubber chemical portion of the claims a settlement was reached on October 2, 2006.  Several plaintiffs have opted out of the terms of this

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settlement which is described below under “Rubber Chemicals.”  The nitrile rubber portion of the Global Settlement Agreement has been approved by the United States District Court for the Western District of Pennsylvania.

ParaTec Elastomers Cross-Claims.  A defendant in the class action lawsuit relating to nitrile rubber, ParaTec Elastomers LLC, a former joint venture in which the Company previously owned a majority interest but now has no interest, asserted cross claims against the Company and its subsidiary Uniroyal in this class action, seeking indemnification for settlements that ParaTec Elastomers LLC has entered into and damages that ParaTec Elastomers LLC has allegedly suffered or may suffer as a result of the Company’s actions, including the Company’s alleged failure to obtain immunity for ParaTec Elastomers with respect to the EC’s investigation of the sale and marketing of nitrile rubber.  The ParaTec Elastomers complaint seeks damages of unspecified amounts, including attorneys’ fees and punitive damages with respect to certain of the alleged causes of action, injunctive relief, pre- and post-judgment interest, costs and disbursements and such other relief as the court deems just and proper.  On August 6, 2004, the Company filed a motion to dismiss the cross claims, or in the alternative to compel arbitration.  On September 29, 2005, the motion to dismiss was granted with respect to the plaintiff’s claims of violation of the Connecticut Unfair Trade Practices Act, breach of contract, fraud and promissory estoppel.  The motion to dismiss was denied with respect to the plaintiff’s claims for contractual indemnification pursuant to the ParaTec Elastomers LLC Agreement, breach of fiduciary duty and breach of covenant of good faith and fair dealing.  In addition, the court denied the Company’s motion to compel arbitration.  The Company has appealed the denial of its motion to compel arbitration. The Company’s appeal was successful and on November 30, 2006 the court granted the Company’s motion to compel arbitration.  The Company believes these claims are without merit, as they relate to conduct occurring exclusively after ParaTec Elastomers was sold.

Remaining Direct and Indirect Purchaser Lawsuits. The Company, individually or together with its subsidiary Uniroyal, and other companies, continues to be or has become a defendant in certain direct and indirect purchaser lawsuits filed in federal courts during the period from May 2004 through January 2006 and in certain state court antitrust class action lawsuits filed in state courts during the period from October 2002 to January 2006 involving the sale of rubber chemicals, EPDM, polychloroprene, nitrile rubber, and urethanes and urethane chemicals.

The complaints in these actions (as further described below) principally allege that the defendants conspired to fix, raise, maintain or stabilize prices for rubber chemicals, EPDM, polychloroprene, nitrile rubber, or urethanes and urethane chemicals, as applicable, sold in the United States in violation of Section 1 of the Sherman Act or 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. With respect to the complaints relating to the sale of polychloroprene (as further described below), although the Company does not sell or market polychloroprene, the complaints allege that the Company and producers of polychloroprene conspired to raise prices with respect to polychloroprene and the other products included in the complaint collectively in one conspiracy.  In each of the foregoing actions, the plaintiffs seek, among other things, treble damages of unspecified amounts, costs (including attorneys’ fees) and injunctive relief preventing further violations or the improper conduct alleged in the complaint.

Rubber Chemicals. The Company has entered into a settlement agreement in the direct federal rubber chemical cases previously subject to the Global Settlement Agreement. In anticipation of this settlement, $36.7 million was added to already existing rubber chemicals reserves in 2006. In October 2006, the $51.0 million was paid into an escrow account and recorded as a deposit included in other current assets on the Company’s consolidated balance sheet at December 31, 2006.  The $51.0 million settlement was paid to the claimant in the first quarter of 2007.  Accordingly, the Company reduced its reserve and deposit by $51.0 million during the first quarter of 2007.  This agreement, when combined with settlements with other entities, means that Chemtura has now resolved over 95 percent of its exposure for United States direct purchaser rubber chemicals claims.

The remaining direct federal lawsuit was filed on June 29, 2006, in the United States District Court, Middle District of Tennessee by Bridgestone Americas Holding, Inc, Bridgestone Firestone North American Tire, LLC, Bandag, Incorporated, and Pirelli Tire, LLC with respect to purchases of rubber chemicals from one or both of the defendants.  This action was transferred to the United States District Court, Northern District of California.  The Company has entered into a settlement agreement resolving the claims with respect to this lawsuit, except for those claims related to Bandag, Incorporated.

The Company and certain of its subsidiaries also remain defendants in seven pending indirect putative class action lawsuits for alleged violations of state law filed in state courts in California, Florida, Massachusetts, Pennsylvania, Tennessee and West Virginia between October 2002 and March 2004.  Plaintiffs in the California lawsuit were denied class certification on January 30, 2006 and are appealing that decision. Two of these lawsuits are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below. The Company and its defendant subsidiaries have filed motions to dismiss with respect to six of these seven pending lawsuits. Certain motions to dismiss remain pending, and other motions to dismiss have been denied by the applicable court, which are being, or will be, appealed by the Company and its defendant subsidiaries.

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EPDM. With respect to EPDM, the Company has entered into settlement agreements with respect to the consolidated EPDM direct purchaser lawsuit previously subject to the Global Settlement Agreement as described above, and a second direct purchaser lawsuit previously pending in the United States District Court, District of Connecticut.  The remaining two pending direct federal purchaser lawsuits are multi-product lawsuits and are described separately under the heading “Multi-Product Lawsuits” below.

The Company and certain of its subsidiaries also remain defendants in eleven pending indirect putative class action lawsuits for alleged violations of state law with respect to EPDM filed in state courts in California, Florida, Iowa, Kansas, Nebraska, New Mexico, New York, North Carolina and Pennsylvania between April 2004 and February 2005.  Four of these lawsuits are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below.  The Company has entered into a settlement agreement resolving claims with respect to one lawsuit filed in Vermont.

Nitrile Rubber. With respect to nitrile rubber, the Company, Uniroyal and other companies are defendants in two multi-product direct purchaser lawsuits involving nitrile rubber, which are described separately below.  The Company and certain of its subsidiaries also remain defendants in four pending indirect putative class action multi-product lawsuits for alleged violations of state law filed in state courts in California, Florida, New York and Pennsylvania.  These lawsuits are described under the heading “Multi-Product Lawsuits” below.

Urethanes. With respect to urethanes, the Company, Uniroyal and other companies are defendants in a consolidated federal direct purchaser class action lawsuit filed in November 2004 in the United States District Court, District of Kansas. This action consolidates twenty-six direct purchaser class action lawsuits previously described in the Company’s prior periodic reports filed with the Securities and Exchange Commission.  The Company, Uniroyal and other companies are also defendants in one direct multi-product lawsuit involving urethanes described separately under the heading “Multi-Product Lawsuits” below.

With respect to Urethanes, the Company remains a defendant in sixteen pending indirect putative class action lawsuits for alleged violations of state law filed in California, Florida, Massachusetts, New York, Pennsylvania and Tennessee, between March 2004 and February 2005.  Four of these lawsuits are multi-product lawsuits and are described under the heading “Multi-Product Lawsuits” below.

Multi-Product Lawsuits. The Company, Uniroyal and other companies are defendants in two federal direct purchaser lawsuits which are multi-product lawsuits for alleged violations of state law.  The first lawsuit was filed on November 16, 2004, in the United States District Court, Northern District of Ohio, by Parker Hannifin Corporation and PolyOne Corporation with respect to purchases of EPDM, nitrile rubber and polychloroprene from one or more of the defendants.  This action has been transferred to the District of Connecticut. Parker Hannifin Corporation’s claims with respect to the nitrile rubber portion of this suit have been settled.  All of PolyOne’s claims with respect to this lawsuit have been settled.

The second lawsuit was filed on February 10, 2005 in Massachusetts state court. This lawsuit was subsequently removed to the United States District Court, District of Massachusetts.  The claims in this lawsuit relate to purchases of any product containing rubber and urethane products, defined to include EPDM, nitrile rubber, urethanes.  The Company’s motion to dismiss this case has been denied by the court and the Company plans to appeal this dismissal.

The Company, its subsidiary Uniroyal, and other companies are defendants in four pending indirect putative purchaser class action lawsuits in four states that each involve multiple products. Two of the outstanding multi-product lawsuits relate to purchases of any product containing rubber and urethane products, defined to include rubber chemicals, EPDM, nitrile rubber and urethanes.  The remaining two outstanding multi-product lawsuits relate to purchases of any product containing rubber and urethane products, defined to include EPDM, nitrile rubber, urethanes.  An indirect purchaser class action previously pending in Massachusetts state court has been removed to the United States District Court, District of Massachusetts and is described above.

At March 31, 2007 and December 31, 2006, the Company had remaining reserves of $32.9 million and $102.5 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” below and the shareholder derivative lawsuit described under “Shareholder Derivative Lawsuit” below.  These reserves cover all direct and indirect purchaser antitrust claims in the rubber, EPDM, urethanes and nitrile rubber civil cases.  The Company periodically reviews its accruals as additional information becomes available, and may adjust its accruals based on later occurring events.

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Canadian Civil Antitrust Actions

EPDM. The Company and the plaintiffs in three previously disclosed Canadian class action lawsuits relating to EPDM have entered into a settlement agreement, dated as of September 19, 2005 (the “EPDM Settlement Agreement”), that is intended to resolve, with respect to the Company and its defendant subsidiaries, the three lawsuits filed in Canada.

The EPDM Settlement Agreement required that the Company pay CDN $4.5 million (approximately U.S. $3.9 million) to the class claimants in Canada covering all direct and indirect purchasers of EPDM during the class period of January 1, 1997 to December 31, 2001 in exchange for the final dismissal with prejudice of the lawsuit as to the Company and its subsidiary defendants and a complete release of all claims against the Company and its subsidiary defendants set forth in the lawsuits.  This settlement amount was paid in the fourth quarter of 2005. The EPDM Settlement Agreement, which has been approved by the applicable courts, permitted potential class members to opt out of the class and the Company to recover a portion of the settlement funds with respect to those potential class members that chose to opt out of the settlement. The opt-out period expired on March 6, 2006 and one class member opted out.  In April of 2006, the Company recovered CDN $0.3 million (approximately U.S. $0.3 million) in previously paid settlement funds related to this opt-out.

Rubber Chemicals. The Company has entered into a settlement agreement, dated as of December 1, 2005 (the “Rubber Chemicals Settlement Agreement”), that is intended to resolve, with respect to the Company and its defendant subsidiaries, four Canadian class action lawsuits.

The Rubber Chemicals Settlement Agreement proposes the certification of the lawsuits as class actions for purposes of the settlement and provides that the Company pay CDN $7.2 million (approximately U.S. $6.4 million) to the class claimants in Canada covering all persons who purchased rubber chemicals products in Canada during the class period of July 1, 1995 to December 31, 2001, in exchange for the final dismissal with prejudice of the lawsuits as to the Company and its defendant subsidiaries and a complete release of all claims against the Company and its defendant subsidiaries set forth in the lawsuits. The Rubber Chemicals Settlement Agreement has been approved by the applicable courts.  The opt out period expired on or about September 18, 2006.  In December 2006, the Company recovered CDN $2.9 million (approximately U.S. $2.6 million) of settlement funds that were related to four potential class members that chose to, or were deemed to, opt out of the settlement.  Additionally in December 2006, the Company made a final payment of CDN $4.3 million (approximately U.S. $3.8 million) to settle this matter.

Polyester Polyols (previously described as Urethanes and Urethane Chemicals). The Company and the plaintiffs in two Canadian class action lawsuits relating to polyester polyols (which is a chemical used in the manufacture of polyurethanes) or products that directly or indirectly contain or are derived from polyester polyols (collectively, “Polyester Polyols”) have entered into a settlement agreement, dated November 8, 2005 (the “Polyester Polyols Settlement Agreement”), that is intended to resolve, with respect to the Company and its defendant subsidiaries, the Canadian lawsuits.

The Polyester Polyols Settlement Agreement proposes the certification of the lawsuits as class actions for purposes of the settlement and provides that the Company pay CDN $69,000 (approximately U.S. $60,000) to the class claimants in Canada who purchased Polyester Polyols in Canada during the class period of February 1, 1998 to December 31, 2002, in exchange for the final dismissal with prejudice of the lawsuits as to the Company and its defendant subsidiaries and a complete release of all claims against the Company and its defendant subsidiaries set forth in the lawsuits. The Polyester Polyols Settlement Agreement, which is subject to the approval of the courts in Ontario and Quebec identified above and notice to class members, permits potential class members to opt out of the class and the Company to recover a portion of the settlement funds with respect to certain potential class members that choose to opt out of the settlement.  The amount of the recovery is not estimable at this time.

At March 31, 2007, the Company had no remaining reserves relating to the direct and indirect purchaser lawsuits for Canadian matters.

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

 

Governmental Reserves:
(In thousands)						U.S. DOJ Fines			Canada Federal Fines			Total U.S and Canada Fines			European Commission
Balance January 1, 2006						$	40,645		$	6,150		$	46,795		$	16,051
2006 Antitrust costs, excluding legal fees						—			72			72			—
Payments						(6,000		)	(961		)	(6,961		)	(16,548		)
Accretion - Interest						2,184			352			2,536			—
Foreign currency translation						—			62			62			497
Balance December 31, 2006						36,829			5,675			42,504			$	—
Accretion - Interest						512			83			595
Foreign currency translation						—			(54		)	(54		)
Balance March 31, 2007						$	37,341		$	5,704		$	43,045
Civil Case Reserves:

 

(In thousands)				U.S. Civil and Securities Matters			Canada Civil Matters			Total U.S. and Canada Civil Matters
Balance January 1, 2006				$	51,411		$	6,154		$	57,565
2006 Antitrust costs, excluding legal fees				81,065			(2,578		)	78,487
Payments				(30,000		)	(3,792		)	(33,792		)
Foreign currency translation				—			216			216
Balance December 31, 2006				102,476			$	—		102,476
2007 Antitrust costs, excluding legal fees				11,260						11,260
Payments				(80,792		)				(80,792		)
Balance March 31, 2007				$	32,944					$	32,944

 

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.

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

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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 and the Crompton Individual Defendants in the related consolidated securities class action lawsuit described above under “Federal Securities Class Action.”

Other

The Company is routinely subject to other civil claims, litigation and arbitration, and regulatory investigations, arising in the ordinary course of its present business as well as in respect of its divested businesses. Some of these claims and litigations relate to product liability claims, including claims related to the Company’s current products and asbestos-related claims concerning premises and historic products of its corporate affiliates and predecessors. The Company believes that it has strong defenses to these claims. These claims have not had a material impact on the Company to date and the Company believes the likelihood that a future material adverse outcome will result from these claims is remote. However, the Company cannot be certain that an adverse outcome of one or more of these claims would not have a material adverse effect on its financial condition, results of operations, or cash flows.

17) CONTINGENCIES

Environmental Matters

Each quarter, the Company evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts.  For each site where the cost of remediation is probable and estimable, a determination is made of 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 the Company and the anticipated time frame over which payments toward the remediation plan will occur. At sites where the Company expects to incur ongoing operation and maintenance expenditures, the Company accrues on an undiscounted basis for a period, which is generally 10 years, where it believes that such costs are estimable.  The total amount accrued for such environmental liabilities at March 31 2007, was $120.7 million.  The Company estimates the determinable environmental liability to range from $120 million to $160 million at March 31, 2007.  The Company’s reserves include estimates for determinable clean-up costs. During the first quarter of 2007, the Company recorded a pre-tax charge of $1.4 million to increase its environmental liabilities and made payments of $6.3 million for clean-up costs, which reduced its environmental liabilities.  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. The Company intends to assert all meritorious legal defenses and will pursue other equitable factors that are available with respect to these matters. However, the final cost of clean-up at these sites could exceed the Company’s present estimates, and could have, individually or in the aggregate, a material adverse effect on the Company’s financial condition, results of operations and cash flows. It is reasonably possible that the Company’s 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.

The Company and some of its subsidiaries have been identified by federal, state or local governmental agencies, and by other potentially responsible parties (a “PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statutes, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States.  Because these regulations have been construed to authorize joint and several liability, the EPA could seek to recover all costs involving a waste disposal site from any one of the PRPs for such site, including the Company, despite the involvement of other PRPs.  In many cases, the Company is one of several hundred PRPs so identified.  In a few instances, the Company is one of only a handful of PRPs, and at one site the Company is the only PRP performing investigation and remediation.  Where other financially responsible PRPs are involved, the Company expects that any ultimate liability resulting from such matters will be apportioned between the Company and such other parties.  In addition, the Company is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad.

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Scarborough  — The Ontario Ministry of the Environment has brought an action against Chemtura Co./Cie in connection with a 2004 release of naphtha sulfonic acid at Chemtura Co./Cie’s Scarborough, Ontario, Canada facility.  Chemtura Co./Cie has agreed to pay a penalty in the amount of CDN $112,500 (approximately U.S. $97,000) to settle this matter.

Legal Proceedings

Vertac — Reference is made to Note 22 (Contingencies) contained in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for information relating to the Vertac litigation.  On April 22, 2007, the Supreme Court of the United States denied petitions for writs of certiorari filed by Uniroyal Chemical Co./Cie and Hercules Incorporated.  This decision lets stand prior rulings under which Uniroyal Chemical Co./Cie has liability to the United States for approximately $2.9 million and liability to Hercules Incorporated for approximately $0.7 million.

Albemarle Corporation — Reference is made to Note 22 (Contingencies) contained in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, for information relating to the Albemarle Corporation litigation.  A hearing on claim construction took place in March 2007, on the two complaints filed by Albemarle Corporation in the United States District Court for the Middle District of Louisiana alleging that the Company infringed three process patents held by Albemarle Corporation relating to bromine vacuum tower technology, and the other alleging that the Company infringed or contributed to or induced the infringement of a patent relating to the use of decabromodiphenyl ethane as a flame retardant in thermoplastics.  The cases were previously consolidated.

Each quarter the Company evaluates and reviews pending claims and litigation to determine appropriate reserve amounts.  As of March 31, 2007, the Company’s accrual for probable loss in the aforementioned legal proceeding cases is immaterial.  In addition, the related receivable to reflect probable insurance recoveries is also immaterial.

The Company intends to assert all meritorious legal defenses and will pursue other equitable factors that are available with respect to these matters.  The resolution of the legal proceedings now pending or hereafter asserted against the Company or any of its subsidiaries could require the Company to pay costs or damages in excess of its present estimates, and as a result could, either individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

In addition to the matters referred to above, the Company is subject to routine litigation in connection with the ordinary course of its business.  These routine matters have not had a material adverse effect on the Company, its business or financial condition in the past, and the Company does not expect this litigation, individually or in the aggregate, to have a material adverse effect on its business or its financial condition in the future, but it can give no assurance that such will be the case.

Guarantees

The Company has standby letters of credit and guarantees with various financial institutions.  At March 31, 2007 and December 31, 2006, the Company had $122.6 million and $127.3 million, respectively, of outstanding letters of credit and guarantees primarily related to its liabilities for environmental remediation, insurance obligations and a pending legal matter.

The letter of credit for the pending legal matter relates to the indemnification liability that Great Lakes may be obligated to pay relating to the OSCA matter.  Reference is made to Note 22 (Contingencies) contained in the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for information relating to the OSCA matter.  The amount of the letter of credit was $16.1 million at March 31, 2007 and December 31, 2006.

The Company has applied the disclosure provisions of FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45) to its agreements that contain guarantee or indemnification clauses. The Company is a party to several agreements pursuant to which it may be obligated to indemnify a third party with respect to certain loan obligations of joint venture companies in which the Company has an equity interest.  These obligations arose to provide initial financing for a joint venture start-up, fund an acquisition and provide project capital.  Such obligations range in duration with terms from origination to maturity between five and nine years.  In the event that any of the joint venture companies were to default on these loan obligations, the Company would indemnify the other party up to its proportionate share of the obligation based upon its ownership interest in the joint venture.  At March 31, 2007, the maximum potential future principal and interest payments due under these guarantees were $18.5 and $1.3 million, respectively.  In accordance with FIN 45, the Company has accrued $2.2 million in reserves, which represents the probability weighted fair value of these guarantees as estimated by an independent appraisal firm.  The reserve has been included in long-term liabilities on the consolidated balance sheet at March 31, 2007 with an offset to the investment included in other assets.

The Company also has a customer guarantee, in which the Company has contingently guaranteed certain debt obligations.  At March 31, 2007 and December 31, 2006, the amount of this guarantee was $2.6 million and $2.0 million, respectively.  Based

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on past experience and on the underlying circumstances, the Company does not expect to have to perform under this guarantee.

In the ordinary course of business, the Company enters into contractual arrangements under which the Company may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on behalf of the Company or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation, claims or environmental matters relating to the Company’s past performance.  For any losses that the Company believes are probable and which are estimable, the Company has accrued for such amounts in its consolidated balance sheets.

18) BUSINESS SEGMENT DATA

The Company evaluates a segment’s performance based on several factors, of which the primary factor is operating profit (loss).  In computing operating profit (loss) by segment, the following items have not been deducted:  (1) general corporate expense; (2) amortization; (3) facility closures, severance and related costs; (4) antitrust costs (5) merger costs and (6) certain accelerated depreciation.  Pursuant to FASB No. 131, “Disclosures about Segments of an Enterprise and Related Information,” these items have been excluded from the Company’s presentation of segment operating profit because they are not reported to the chief operating decision maker for purposes of allocating resources among reporting segments or assessing segment performance.

General corporate expense includes costs and expenses that are of a general corporate nature or managed on a corporate basis, including amortization expense.  These costs are primarily for corporate administration services, costs related to corporate headquarters and management compensation plan expenses for executives and corporate managers.  Facility closures, severance and related costs are primarily for severance costs related to the Company’s 2007 and 2006 cost savings initiatives, and revisions to reserves related to the 2004 activity-based restructuring initiative and the cost reduction initiatives that began in 2003.  The antitrust costs are primarily for settlement offers and legal costs associated with antitrust investigations and related civil lawsuits.  Merger costs are non-capitalizable costs associated with the Merger and integration of Crompton and Great Lakes.  Certain prior year business segment amounts have been reclassified to conform to the current year’s presentation.

A summary of business data for the Company’s reportable segments for the quarter ended March 31, 2007 and 2006 are as follows:

 

Information by Business Segment

 

 

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19) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL DATA

The Company’s obligations under its 7% Notes due 2009, 6.875% Notes due 2016 and 6.875% Debentures due 2026 (collectively, “the Notes”), are jointly and severally, fully and unconditionally guaranteed by certain wholly-owned domestic subsidiaries of the Company that guarantee the Company’s $740 million credit facility (the “Guarantor Subsidiaries”).  The Company’s subsidiaries that do not guarantee the Notes are referred to as the “Non-Guarantor Subsidiaries”. The Guarantor Condensed Consolidating Financial Data presented below presents the statements of operations, balance sheets and statements of cash flow data: (i) for Chemtura Corporation (the “Parent Company”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis (which is derived from Chemtura Corporation’s historical reported financial information); (ii) for the Parent Company, alone (accounting for its Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on an equity basis under which the investments are recorded by each entity owning a portion of another entity at cost, adjusted for the applicable share of the subsidiary’s cumulative results of operations, capital contributions and distributions, and other equity changes); (iii) for the Guarantor Subsidiaries alone; and (iv) for the Non-Guarantor Subsidiaries alone.

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