| Chemtura CORP ITEM 1A RISK FACTORS The factors described below represent the principal risks that could materially adversely affect our operating results and financial condition |
| Except as otherwise indicated, these factors may or may not occur and we cannot predict the likelihood of any such factor occurring |
| Other risk factors may exist that we do not consider significant based on information that is currently available |
| In addition, new risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial performance |
| A decline in general economic conditions and other external factors may adversely impact our results of operations External factors, including general economic conditions, international events and circumstances, competitor actions and governmental regulation are beyond our control and can cause fluctuations in demand and volatility in the price of raw materials and other costs that can intensify the impact of economic cycles on our operations |
| We produce a broad range of products that are used as additives and components in other products in a wide variety of end-use markets |
| As a result, our products may be negatively impacted by supply and demand instability in other industries and the effects of that instability on supply chain participants |
| Political conditions in countries in which we operate may also adversely impact our operations |
| These same risks may also impact the financial markets and may negatively affect our access to capital |
| While these external factors may adversely affect our businesses, we believe that the breadth of our product offering lessens our dependence on any one market and that our worldwide presence further reduces our exposure to economic conditions or political instability in any one country or region |
| Significant competition may force us to reduce prices, which may adversely impact our results of operations |
| We face significant competition in many of the markets in which we operate as a result of the trend toward global expansion and consolidation by competitors |
| Some of our existing competitors are larger than we are and may have more resources and better access to capital markets to facilitate continued expansion or new product development |
| Some of our competitors also have greater product range or better distribution capability than we do for specific products or geographic regions |
| Price competition also exists in our operating markets due to factors such as industry overcapacity and lower cost structures |
| We expect that we will continue to face new competitive challenges as well as additional risks inherent in international operations in developing regions |
| We also expect to face increased competition from the further use and introduction of generic and alternative products by our competitors |
| This increased competition could cause us to reduce our prices and take other steps to compete effectively, which could negatively affect our results of operations |
| In addition, even if we were to raise prices, the reactions of our competitors and customers to such price increases could cause us to reevaluate and possibly reverse such price increases or risk a loss in sales volumes |
| In 2005, prices were increased in our non-flame retardant plastic additives business, and we lost volumes |
| 11 ______________________________________________________________________ The businesses of many of our customers are cyclical in nature and sensitive to changes in general economic conditions, which may adversely impact our results of operations |
| An economic downturn in the businesses or geographic areas in which we sell our products could reduce demand for these products and result in a decrease in sales volume and results of operations |
| The cyclicality of the chemicals industry may cause significant fluctuations in our operating results and cash flow |
| Our historical operating results reflect the cyclical and volatile nature of the supply and demand balance of the chemicals industry |
| The chemicals industry has experienced alternating periods of inadequate capacity and tight supply, allowing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity and utilization rates, and declining prices and profit margins |
| The cyclicality of the markets in which we operate may result in volatile operating results and cash flow over the business cycle |
| Currently, we believe there is excess capacity in some non-flame retardant plastic additives product lines |
| From time to time EPDM and rubber additive markets suffer from overcapacity |
| Future growth in product demand may not be sufficient to utilize current or future capacity |
| Excess industry capacity has depressed and may continue to depress our volumes and margins on some products |
| As a result of excess industry capacity, rising energy costs and rising raw materials costs, operating results may be volatile |
| Any disruption in the availability or price, or deterioration in the quality, of the raw materials or energy utilized for our products may have a material adverse effect on our operating results |
| We purchase large amounts of raw materials and energy for our businesses |
| The costs of these materials and energy, in the aggregate, represent a substantial portion of our operating expenses |
| The prices and availability of the raw materials used by us vary with market conditions and may be highly volatile |
| Over the past few years, we have experienced significant cost increases in purchases of petrochemicals, tin, soybean oil, other raw materials and our primary energy source, natural gas |
| While we may attempt to match raw material or energy price increases with corresponding product price increases, we may not be able to immediately raise product prices, if at all |
| Ultimately, our ability to pass on increases in the cost of raw materials or energy to customers is greatly dependent upon market conditions and raising prices could result in a loss of sales volume |
| There have been in the past, and will likely be in the future, periods of time during which we are unable to pass raw material and energy price increases on to our customers, in whole or in part |
| Reactions by our customers and competitors to our price increases could cause us to reevaluate and possibly reverse such price increases, which may increase our operating expenses and negatively affect our operating results |
| The results of our Crop Protection business are dependent on weather, disease, and pest conditions and can be affected by local and regional economic circumstances |
| The results of our Consumer Products business are also dependent on weather conditions |
| Adverse weather or economic conditions could materially affect our results of operations |
| Sales volumes for our Crop Protection business, as with all agricultural products, are subject to the sector’s dependency on weather, disease, and pest infestation conditions |
| Adverse conditions in a particular region could materially adversely affect our Crop Protection business |
| Demand for crop protection products is also influenced by the agricultural policies of governments and regulatory authorities particularly in developing countries in regions where we do business, such as in Asia and Latin America |
| Changes in governmental policies or product registration requirements could have an adverse impact on our ability to market and sell our products |
| Also, Crop Protection products typically are sold pursuant to contracts with extended payment terms in Latin America and Europe |
| Extended payment periods make our Crop Protection business susceptible to losses from receivables during economic crises and may adversely affect our operating results |
| Our pool and spa products in the Consumer Products business are primarily used in swimming pools and hot tubs |
| An adverse change in weather patterns during pool season could adversely affect the profitability of our pool and spa products |
| 12 ______________________________________________________________________ Current and future litigation, governmental investigations and administrative claims, including antitrust-related governmental investigations and lawsuits, could harm our financial condition, results of operations and cash flows |
| We are currently involved in a number of governmental investigations and administrative claims, including antitrust-related governmental investigations and civil lawsuits |
| That number could increase in the future |
| Further, we have incurred and could incur significant additional expense in the future in connection with antitrust-related matters, including expenses related to our cooperation with governmental authorities and defense related civil lawsuits |
| We are also involved in several significant lawsuits and claims relating to environmental matters |
| In addition, we are routinely subject to other civil claims, litigation and arbitration, and regulatory investigations, arising in the ordinary course of our present businesses as well as in respect of our divested businesses |
| Some of these claims and lawsuits relate to product liability claims, including claims related to current products and asbestos related claims concerning premises and historic products of corporate affiliates and predecessors |
| We also could become subject to additional claims in the future |
| An adverse outcome of one or more of these claims could have a material adverse effect on our business or results of operations |
| Environmental, health and safety regulation matters could have a substantial negative impact on our results of operations and cash flows |
| We are subject to extensive federal, state, local and foreign environmental, safety and health laws, and regulations concerning, among other things, emissions in the air, discharges to land and water, and the generation, handling, treatment and disposal of hazardous waste and other materials |
| Our operations entail the risk of violations of those laws and sanctions for violations, such as clean-up costs, costs of waste disposal, and payments for property damage and personal injury |
| Although it is our policy to comply with such laws and regulations, it is possible that we have not been or may not be at all times in compliance with all of these requirements |
| In addition, these requirements, and enforcement of these requirements, may become more stringent in the future |
| The ultimate cost of compliance with any such requirements could be material |
| Non-compliance could subject us to material liabilities, such as government fines or orders, third-party lawsuits, remediations, and settlements, or the suspension of non-compliant operations |
| We may also be required to make significant site or operational modifications at substantial cost |
| Future regulatory or other developments could also restrict or eliminate the use of or require us to make modifications to our products, packaging, manufacturing processes and technology, which could have a significant adverse impact on our cash flow and results of operations |
| At any given time, we are involved in claims, litigation, administrative proceedings, settlements, and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage, personal injury, and regulatory compliance or noncompliance |
| The resolution of these environmental matters could have a material adverse effect on our results of operations or cash flow |
| We are an international company and are exposed to risks in the countries in which we have significant operations or interests |
| Changes in foreign laws and regulatory requirements, export controls or international tax treaties could adversely affect our results of operations |
| We are dependent, in large part, on the economies of the countries in which we manufacture and market our products |
| Of our 2005 net sales, 55prca were to customers in the US and Canada, 26prca to Europe and Africa, 13prca to Asia/Pacific, and 6prca to Latin America |
| We believe that the inclusion of the former Great Lakes businesses for the entire year would not change these percentages significantly |
| Our net property, plant and equipment at December 31, 2005 was located 68prca in the US and Canada, 28prca in Europe and Africa, 3prca in Asia/Pacific and 1prca in Latin America |
| The economies of these countries in these areas are in different stages of socioeconomic development |
| Consequently, we are exposed to risks from changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability and other political, economic or social developments that may materially reduce our net income |
| We may also face difficulties managing and administering an internationally dispersed business |
| In particular, the management of our personnel across several countries can present logistical and managerial challenges |
| Additionally, international operations present challenges related to operating under different business cultures and languages; we may have to comply with unexpected changes in foreign laws 13 ______________________________________________________________________ and regulatory requirements which could negatively impact our operations and ability to manage our global financial resources; export controls or other regulatory restrictions could prevent us from shipping our products into and from some markets; we may not be able to adequately protect our trademarks and other intellectual property overseas due to uncertainty of laws and enforcement in a number of countries relating to the protection of intellectual property rights; and changes in tax regulation and international tax treaties could significantly reduce the financial performance of our foreign operations or the magnitude of their contributions to our overall financial performance |
| Our results of operations are subject to exchange rate and other currency risks |
| A significant movement in exchange rates could adversely impact our results of operations |
| Significant portions of our businesses are conducted in currencies other than the US dollar, which is the reporting currency of each |
| This means that foreign currency exchange rates affect our operating results |
| The following table shows the impact of foreign currency exchange rates on our pre-tax loss from continuing operations and net sales for 2005, 2004 and 2003: Year Ended December 31 (In millions) 2005 2004 2003 Pre-tax loss from continuing operations $ (119dtta7 ) $ (91dtta7 ) $ (152dtta9 ) Impact of favorable (unfavorable) foreign currency translation on pre-tax earnings (loss) from continuing operations $ 6dtta2 $ (2dtta8 ) $ (3dtta9 ) Net sales $ 2cmam986dtta6 $ 2cmam285dtta2 $ 1cmam941dtta8 Impact of favorable foreign currency translation on net sales $ 20dtta4 $ 54dtta7 $ 76dtta1 Effects of exchange rate fluctuations upon our future operating results cannot be predicted because of the number of currencies involved, the variability of currency exposures, and the potential volatility of currency exchange rates |
| We will face risks arising from the imposition of exchange controls and currency devaluations |
| Exchange controls may limit our ability to convert foreign currencies into US dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls |
| Currency devaluations result in diminished value of funds denominated in the currency of the country instituting a devaluation |
| Actions of this nature could adversely affect our earnings or cash flow |
| We have unfunded and underfunded pension plans and post-retirement health care plans, which could adversely impact our results of operations or cash flows |
| We have substantial unfunded obligations under our domestic tax-qualified defined benefit pension plans, totaling approximately dlra140dtta0 million on a projected benefit obligation basis as of December 31, 2005 |
| A significant decline in the value of the plan investments in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding |
| We also sponsor foreign and non-qualified pension plans under which there are substantial unfunded liabilities, totaling approximately dlra194dtta0 million on a projected benefit obligation basis as of December 31, 2005 |
| In addition, we sponsor post-retirement health care plans under which there are substantial unfunded liabilities, totaling approximately dlra155dtta5 million on a projected benefit obligation basis as of December 31, 2005 |
| Mandatory funding contributions with respect to our tax-qualified pension plans and potential unfunded benefit liability claims could have a material adverse effect on our financial condition, results of operations or cash flow |
| Changes in our sales strategy may impact our results of operations and our ability to service our customers |
| 14 ______________________________________________________________________ We recently began to utilize third-party distributors for sales and service to some customers that purchase small annual quantities of our products |
| We believe that this action will lower our costs to serve smaller customers, thus enhancing profitability, and reduce our investment in inventory |
| However, it is possible that changing our sales strategy with respect to these customers could result in the loss of some sales to some customers or some disruption in selling and in inventory management during the transition |
| We are dependent upon a trained, dedicated sales force, the loss of which could materially affect our operations |
| Many of our products are sold and supported through dedicated staff and specifically trained personnel |
| The loss of this sales force due to market or other conditions could affect our ability to sell and support our products effectively, which could have an adverse effect on our results of operations |
| Production facilities are subject to operating risks that may adversely affect our operations |
| We are dependent on the continued operation of our production facilities |
| Such production facilities are subject to hazards associated with the manufacturing, handling, storage, and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, fires, inclement weather and natural disasters, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, remediation complications, chemical spills, discharges or releases of toxic or hazardous gases, storage tank leaks, and other environmental risks |
| These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental damage, fines, and liabilities and could have a material adverse effect on our business, financial condition, or results of operations |
| Our business depends upon many proprietary technologies, including patents and licenses |
| Our competitive position could be adversely affected if we fail to protect our patents or other intellectual property rights, or if we become subject to claims that we are infringing upon the rights of others |
| We have over 4cmam100 United States and foreign patents and pending applications and have trademark protection for approximately 1cmam100 product names |
| Patents, trademarks, trade secrets in the nature of know-how, formulations, and manufacturing techniques assist us in maintaining the competitive position of certain of our products |
| Our intellectual property is of particular importance to a number of specialty chemicals we manufacture and sell |
| We are licensed to use certain patents and technology owned by other companies, including some foreign companies, to manufacture products complementary to our own products, for which we pay royalties in amounts not considered material, in the aggregate, to our consolidated results |
| Our trademarks or the patents we own or license may be challenged, and as a result of such challenges we could lose our exclusive rights to our proprietary technologies, which would adversely affect our competitive position and our results of operations |
| We also rely on unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position |
| While it is our policy to enter into confidentiality agreements with our employees and third parties to restrict the use and disclosure of our trade secrets and proprietary know-how, those confidentiality agreements may be breached or may not provide meaningful protection |
| In addition, adequate remedies may not be available in the event of an unauthorized use or disclosure of such trade secrets and know-how, and others could obtain knowledge of such trade secrets through independent development or other access by legal means |
| The failure of our patents, trademarks or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets, or proprietary know-how could have a material adverse effect on our business, financial condition, results of operations, or cash flows |
| Our patents may not provide full protection against competing manufacturers outside of the United States, the European Union countries, and certain other developed countries |
| Weaker protection may adversely impact our sales and results of operations |
| In some of the countries in which we operate, such as China, the laws protecting patent holders are significantly weaker than in the United States, the European Union, and certain other developed countries |
| Weaker protection may help competing manufacturers be or become more competitive in markets where, but for the weaker protection, they might not otherwise be able to introduce competing products for a number of years |
| We therefore tend, in these regions, to rely more heavily upon trade secret and know-how protection, as applicable, than we do 15 ______________________________________________________________________ patents |
| In addition, for our crop protection products being sold in China, we rely on regulatory protection of intellectual property provided by regulatory agencies that may not provide us with the protection we desire |
| An inability to remain technologically innovative and to offer improved products and services in a cost-effective manner could adversely impact our operating results |
| Our operating results are influenced in part by our ability to introduce new products and services that offer distinct value to our customers |
| For example, our Crop Protection business seeks to provide tailored products for our customers’ often unique problems, which requires an ongoing level of innovation |
| In many of the markets where we sell our products, the products are subject to a traditional product life cycle |
| We devote significant human and financial resources to develop new technologically advanced products and services and we may not be successful in our research and development efforts |
| The inability to realize the cost savings and other benefits that we expect from Merger synergies and other cost reduction initiatives may adversely impact our results of operations |
| We have undertaken various cost reduction initiatives over the past several years and continue to aggressively pursue cost reductions |
| These initiatives are described under “Cost Reduction Programs” below |
| Through December 31, 2005, we had realized annualized pre-tax cost savings of approximately dlra53dtta4 million from the activity-based restructuring initiative completed in 2004, and dlra28 million of cost savings from other programs, including Six Sigma and Lean Manufacturing |
| As a result of our efforts, we have realized and expect to realize additional cost reductions |
| Actual pre-tax merger related savings, based on the pro forma combined operations of the Company and Great Lakes for the year ended December 31, 2005 versus the pro forma combined results for the year ended December 31, 2004 totaled approximately dlra19dtta3 million |
| We are continuing to identify savings opportunities and we expect to achieve approximately dlra80 to dlra90 million of incremental savings in 2006 versus the pro forma combined results in 2005 and approximately dlra50 million of incremental savings in 2007, for a cumulative total of approximately dlra150 million |
| Notwithstanding our plans and expectations, we may not realize additional cost or merger related savings or other benefits, and even if we realize these benefits, any cash savings that we achieve may be offset by pressures from our customers to reduce prices or by higher raw material and other costs |
| Our failure to realize these anticipated benefits could have a material adverse effect on our business, results of operations, and financial condition |
| Convergence of our information systems could have an adverse effect on our internal controls over financial reporting or our results of operations |
| We intend to integrate the former Great Lakes enterprise-wide information system and certain international systems into our existing SAP system in order to standardize our data and create efficiencies in processing information |
| The transition from these systems to one standard system could adversely affect our business and operations and the timeliness with which we report our operating results |
| Any discord with our venture partners could potentially adversely affect the business and operations of the ventures and in turn the business and operations of the Company |
| A portion of our operations is conducted through certain unconsolidated ventures described above |
| We share control of these ventures with third parties and in the event that our venture partners do not observe their venture obligations, it is possible that the affected venture would not be able to operate in accordance with its business plans or that we would have to increase our level of commitment to the venture to give effect to those plans |
| By making these arrangements with third parties we run the risk of encountering differences of opinion or having difficulty reaching consensus with respect to certain business issues |
| An inability to execute our portfolio divestiture plan could negatively impact our financial condition The assessment of the businesses in our portfolio is complete and we are in discussions regarding potential transactions |
| Announcements will be made as agreements become firm |
| While we estimate the potential proceeds from these divestitures could be in the range of approximately dlra150 million to dlra200 million, there can be no assurance that any of these sales can be successfully concluded, nor that we will realize the proceeds we expect to receive |