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EX-24.(B) - EXHIBIT 24(B) - SOLUTIA INCc96152exv24wxby.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-13255
SOLUTIA INC.
(Exact name of registrant as specified in its charter)
     
Delaware   43-1781797
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
575 Maryville Centre Drive, P.O. Box 66760, St. Louis, Missouri   63166-6760
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (314) 674-1000
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
     
$.01 par value Common Stock   New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Title of each class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes þ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller Reporting Company o
        (Do not check if smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by Court. þ Yes o No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009): approximately $583.7 million.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 121,432,308 shares of common stock, $.01 par value, outstanding as of the close of business on January 31, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
     
Portion of Definitive Proxy Statement for Annual Meeting of Stockholders on April 21, 2010
  Part III
   
 
 

 

 


Table of Contents

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which can be identified by the use of words such as “believes,” “expects,” “may,” “will,” “intends,” “plans,” “estimates,” “estimated,” or “anticipates,” or other comparable terminology, or by discussions of strategy, plans or intentions. These statements are based on management’s current beliefs, expectations, and assumptions about the industries in which we operate. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks and uncertainties described in the Item 1A. Risk Factors section of this report. We disclaim any intent or obligation to update or revise any forward-looking statements in response to new information, unforeseen events, changed circumstances or any other occurrence.

 

 


TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
SIGNATURES
EXHIBIT INDEX
Exhibit 10(j)
Exhibit 10(k)
Exhibit 10(l)
Exhibit 21
Exhibit 23
Exhibit 24(a)
Exhibit 24(b)
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)


Table of Contents

PART I
ITEM 1.  
BUSINESS
Company Overview
We are a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. We maintain a global infrastructure consisting of 25 manufacturing facilities, 6 technical centers and over 26 sales offices globally, including 12 facilities in the United States. We employ approximately 3,400 individuals around the world.
We were formed in April 1997 by Pharmacia Corporation (“Pharmacia”), which was then known as Monsanto Company (“Old Monsanto”) to hold and operate substantially all of the assets, and assume all of the liabilities of Old Monsanto’s historical chemicals business. Pharmacia spun us off to Pharmacia’s shareholders and we became an independent company in September 1997 (the “Solutia Spinoff”).
On December 17, 2003, we and our 14 U.S. subsidiaries filed voluntary petitions for Chapter 11 to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain postretirement benefits (the “Legacy Liabilities”) and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. On February 28, 2008 (the “Effective Date”), we consummated our reorganization and emerged from bankruptcy pursuant to our Fifth Amended Joint Plan of Reorganization (the “Plan”). See the accompanying consolidated financial statements for additional discussion of our changes in capitalization relating to this event.
On June 1, 2009, we sold substantially all the assets and certain liabilities, including environmental remediation and pension liabilities of active employees, of our Integrated Nylon business to an affiliate of S.K. Capital Partners II, L.P. (“Buyer”), a New York-based private equity firm. We used the proceeds from the sale to pay down debt under our $350 million senior secured asset-based revolving credit facility (“Revolver”). Completion of the sale of the Integrated Nylon business completes the transformation of Solutia into a pure-play performance materials and specialty chemicals company.
Segments; Principal Products
Our reportable segments are:
   
Saflex;
   
CPFilms; and
   
Technical Specialties.
The tabular and narrative information contained in Note 19 — Segment and Geographic Data — to the accompanying consolidated financial statements is incorporated by reference into this section.
Saflex
Saflex is the world’s largest producer of PVB (Polyvinyl Butyral) sheet, a plastic interlayer used in the manufacture of laminated glass for automotive, architectural and energy applications. In addition to PVB sheet, which is mostly marketed under the SAFLEX® brand, we manufacture specialty intermediate PVB resin products sold under the BUTVAR® brand, optical grade PVB resin and plasticizer.
PVB is a specialty resin used in the production of laminated safety glass sheet, an adhesive interlayer with high tensile strength, impact resistance, transparency and elasticity that makes it particularly useful in the production of safety glass. Laminated safety glass is predominately produced with PVB sheet and is legislated in all industrialized countries for automobile windshields. Developing countries also use laminated safety glass in automotive windshields although it is not formally legislated. Approximately 40 percent of sales to the automotive sector are for aftermarket replacement windows. Architectural laminated safety glass is widely used in the construction of modern office buildings, airports and residential homes. PVB sheet is also used as an encapsulant in the growing thin film solar cell market. Other applications for PVB resin include non-sheet applications such as wash primers and other surface coatings, specialty adhesive formulations and inks.

 

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Principal Products
                         
Major End-Use   Major Products   Major   Major Raw   Major   Major End-Use
Markets   Brand   Description   Competitors   Materials   Plants(1)   Applications
CONSTRUCTION AND HOME FURNISHINGS
  SAFLEX® BUTVAR®   Laminated window glass
Specialty intermediate PVB resin
  DuPont
Kuraray
Sekisui
  Butyraldehyde
Ethanol
Polyvinyl alcohol
Vinyl acetate
monomer
  Ghent, Belgium
Springfield, MA
Santo Toribio, Mexico
Suzhou, China
Sao Jose dos Campos, Brazil
  Products to increase the safety, security, sound attenuation, energy efficiency and ultraviolet protection of architectural glass for residential and commercial structures
 
                       
VEHICLES
  SAFLEX® BUTVAR®   Laminated window glass
Specialty intermediate PVB resin
  DuPont
Sekisui
  Butyraldehyde
Ethanol
Polyvinyl alcohol
Vinyl acetate monomer
  Ghent, Belgium
Santo Toribio, Mexico
Springfield, MA
Suzhou, China
Sao Jose dos Campos, Brazil
  Products to increase the safety, security, sound attenuation and ultraviolet protection of automotive glass
     
(1)  
Major plants are comprised of those facilities at which each of the identified major products conclude their respective manufacturing processes. The major products may pass through other of our plants prior to the final sale to customers.
CPFilms
CPFilms is one of the world’s largest manufacturers of solar control, decorative, safety and security window films for aftermarket automotive and architectural applications marketed predominantly under the trademarks of LLUMAR®; VISTA®; GILA®; and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS®. CPFilms also manufactures precision coated films providing performance film enhancement such as vacuum metalizing, sputter coating, deep dyeing and coating and laminating which are used in a wide variety of products including those within the growing industries of electronics and energy.

 

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Principal Products
                         
Major End-Use   Major Products   Major   Major Raw   Major   Major End-Use
Markets   Brand   Description   Competitors   Materials   Plants(1)   Applications
CONSTRUCTION AND HOME FURNISHINGS
  LLUMAR® VISTA® GILA®   Professional window films
Retail window films
  3M
Madico
Bekaert
  Polyester film   Martinsville, VA   After-market films for solar control, security and safety
 
                       
VEHICLES
  LLUMAR® FORMULA ONE® GILA®   Professional window films
Retail window films
  Johnson Laminating
Garware
Commonwealth Laminating
NovoMatrix
Hanita Coatings
  Polyester film   Martinsville, VA   Products to increase the safety, security, sound attenuation and ultraviolet protection of automotive glass and give vehicles a custom appearance
 
                       
INDUSTRIAL APPLICATIONS & ELECTRONICS
  Metalized films
Sputtered films
Deep-dyed films
Release liners
  Components
Enhanced polymer films
  3M
Intellicoat
Mitsubishi
Southwall
VDI
Technimet
Nitto Denko
Toppan
  Polyester film
Indium tin
Precious metals
  Martinsville, VA
Canoga Park, CA
  Window films’ tapes, automotive badging, optical and colored filters, shades, reprographics, and packaging uses, computer touch-screens, electroluminescent displays for hand-held electronics and watches, and cathode ray tube and LCD monitors
     
(1)  
Major plants are comprised of those facilities at which each of the identified major products conclude their respective manufacturing processes. The major products may pass through other of our plants prior to the final sale to customers.
Technical Specialties
Technical Specialties is our specialty chemicals segment which includes the manufacture and sale of chemicals for the rubber, solar energy, process manufacturing and aviation industries.
Chemicals for the rubber industry help cure and protect rubber, impart desirable properties to cured rubber, increase durability and lengthen product life. These products play an important role in the manufacture of tires and other rubber products such as belts, hoses, seals and footwear.
We manufacture approximately 50 different products for the rubber chemicals industry which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur, and rubber chemicals. Insoluble sulfur is a key vulcanizing agent manufactured predominantly for the tire industry. We are the world’s leading supplier of insoluble sulfur and market under the trade name of CRYSTEX®. We have three product groups within rubber chemicals: antidegradants, accelerators, and other rubber chemicals.
THERMINOL® heat transfer fluids are used for indirect heating or cooling of chemical processes in various types of industrial equipment and in solar energy power systems. The fluids provide enhanced pumping characteristics because they remain thermally stable at high and low temperatures.

 

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SKYDROL® brand aviation hydraulic fluids and SKYKLEEN® brand of aviation solvents are supplied across the aviation industry. The SKYDROL® line includes fire-resistant hydraulic fluids, which are used in more than half of the world’s commercial aircraft.
Principal Products
                         
Major End-Use   Major Products   Major   Major Raw   Major   Major End-Use
Markets   Brand   Description   Competitors   Materials   Plants(1)   Applications
RUBBER CHEMICALS
  CRYSTEX® SANTOFLEX® SANTOCURE® PERKACIT®   Insoluble sulfur Antidegradant Primary and ultra accelerators   Lanxess
Chemtura
Shikoku
Oriental Carbon
Chemicals
Limited (India)
NCC
Sinorgchem
  Benzene derivatives
Ketones
Sulfur
CS2
Napthenic processing oil
  Antwerp, Belgium
Itupeva, Brazil
Kashima, Japan
Monongahela, PA
Lemoyne, AL
Nienburg, Germany
Kuantan, Malaysia
Sauget, IL
Sete, France
Termoli, Italy
Sao Jose dos
Campos, Brazil
  Products critical to the manufacture of finished rubber as they increase the productivity of the manufacturing process and the quality of the end product with improved resilience, strength and resistance to wear and tear. Primary application is in the production of tires.
 
                       
CAPITAL EQUIPMENT
  THERMINOL®   Heat transfer fluids   Dow   Benzene
Phenol
  Anniston, AL Newport, U.K.   Heat transfer fluids for a wide variety of manufacturing and refining uses
 
                       
AVIATION & TRANSPORTATION
  SKYDROL® SKYKLEEN®   Aviation hydraulic fluids
Aviation solvents
  ExxonMobil   Phosphate esters   Anniston, AL   Hydraulic fluids for commercial aircraft, and environmentally friendly solvents for aviation maintenance
     
(1)  
Major plants are comprised of those facilities at which each of the identified major products conclude their respective manufacturing processes. The major products may pass through other of our plants prior to the final sale to customers.
Sale of Products
We sell our products directly to end users in various industries, principally by using our own sales force, and, to a lesser extent, by using distributors.
We maintain inventories of finished goods, goods in process and raw materials to meet customer requirements and our scheduled production. In general, we do not manufacture our products against a backlog of firm orders; we schedule production to meet the level of incoming orders and the projections of future demand. However, in the Saflex segment, a large portion of sales for 2009 were pursuant to volume commitments. We do not have material contracts with the government of the United States or any state, local or foreign government. In 2009, no single customer or customer group accounted for 10 percent or more of our net sales.

 

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Our second and third quarters are typically stronger than our first and fourth quarters because sales of window films are stronger in the spring and summer.
Competition
The global markets in which our businesses operate are highly competitive. We expect competition from other manufacturers of the same products and from manufacturers of different products designed for the same uses as our products to continue in both U.S. and international markets. Depending on the product involved, we encounter various types of competition, including price, delivery, service, performance, product innovation, product recognition and quality. Overall, we regard our principal product groups as competitive with many other products of other producers and believe that we are an important producer of many of these product groups. For additional information regarding competition in specific markets, see the charts under “Segments: Principal Products” above.
Raw Materials and Energy Resources
We buy large amounts of commodity raw materials and energy resources, including benzene, vinyl acetate, sulfur, polyvinyl alcohol, 2-ethyl hexanol and natural gas. We typically buy major requirements for key raw materials pursuant to contracts with average contractual periods of one to four years. We obtain certain important raw materials from a few major suppliers. In general, in those cases where we have limited sources of raw materials, we have developed contingency plans to the extent practicable to minimize the effect of any interruption or reduction in supply. However, we also purchase raw materials from some single source suppliers in the industry and in the event of an interruption or reduction in supply, might not be able to mitigate any negative effects.
While temporary shortages of raw materials and energy resources may occasionally occur, these items are generally sufficiently available to cover our current and projected requirements. However, their continuing availability and price may be affected by unscheduled plant interruptions and domestic and world market conditions, political conditions and governmental regulatory actions. Due to the significant quantity of some of these raw materials and energy resources that we use, a minor shift in the underlying prices for these items can result in a significant impact on our cost profile and, potentially, our consolidated financial position and results of operations.
Intellectual Property
We own a large number of patents that relate to a wide variety of products and processes and have pending a substantial number of patent applications. We also own and utilize across our business segments a significant amount of valuable technical and commercial information that is highly proprietary and maintained as a trade secret. In addition, we are licensed under a small number of patents owned by others. We own a considerable number of established trademarks in many countries as well as related internet domain names under which we market our products. This intellectual property in the aggregate is of material importance to our operations and to our various business segments.
Research and Development
Research and development constitute an important part of our activities. Our expenses for research and development amounted to $14 million in 2009, $19 million in 2008 and $26 million in 2007, or about 1.1 percent of net sales on average. We focus our expenditures for research and development on process improvements and selected product development.
Our research and development programs in the Saflex segment include new products and processes for the window glazing and photovoltaic markets. Several new products for the photovoltaic market have achieved International Electrotechnical Commission (IEC) qualification and are in various stages of commercialization. New products are designed to help customers reduce encapsulation cost, address quality issues or increase efficiency of thin film photovoltaic cells. Acoustic safety interlayers have been successfully introduced to the automotive and architectural markets. An Absolute Black super-wide privacy interlayer has been introduced in the architectural market. New process technology for super-wide acoustic interlayers is being installed in our Ghent, Belgium facility.
Our research and development programs in the CPFilms segment include new products for the glass treatment, display and electronics markets. Window films and technical coatings that meet the challenges of energy efficiency and energy harvesting continue to be developed. New products using advances in exterior coatings, silicone release formulations, transparent conductive coatings and signal enabling technologies are being commercialized.

 

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Our research and development programs in the Technical Specialties segment include new products for the specialty chemicals markets and emphasize the balance between manufacturing cost reduction and capacity expansion in our rubber chemical business. A new heat transfer fluid has been commercialized and a new aviation fluid continues to perform well in the industry flight service evaluations and approval is expected in 2010. We have made significant progress in cost reduction through process optimization and energy reduction across most of our rubber chemical product lines.
Environmental Matters
The narrative appearing under “Environmental Matters” in Item 7 below is incorporated by reference.
Employee Relations
On December 31, 2009, we had approximately 3,400 employees worldwide: with U.S. employees constituting 52 percent of the total number of employees. Approximately 1,000 of the European employees are represented by either a union delegation, works council or employee forum. Approximately 29 percent of our U.S. workforce is currently represented by various labor unions at the following sites: Anniston, Alabama; Sauget, Illinois; Monongahela, Pennsylvania; Springfield, Massachusetts; and Trenton, Michigan.
Each of our U.S. labor unions (except at the Monongahela, Pennsylvania site) individually ratified a five-year agreement in 2005, which is set to expire December 31, 2010, that established retirement and health and welfare benefits for our employees at the above sites. Local collective bargaining agreements that cover wages and working conditions at the above sites expire between March 2010 and January 2013. The collective bargaining agreement for the Monongahela, Pennsylvania site includes wages, working conditions, retirement and health & welfare benefits.
International Operations
We are engaged in manufacturing, sales and research and development in areas outside the United States. Approximately 75 percent of our consolidated sales from continuing operations for the year ended December 31, 2009 were made into markets outside the United States, including Europe, Canada, Latin America and Asia. Of our consolidated sales from continuing operations, 12 percent were made into China for the year ended December 31, 2009.
Operations outside the United States are potentially subject to a number of risks and limitations that are not present in domestic operations, including trade restrictions, investment regulations, governmental instability and other potentially detrimental governmental practices or policies affecting companies doing business abroad. Operations outside the United States are also subject to fluctuations in currency values. The functional currency of each of our non-U.S. operations is generally the local currency. Exchange rates between these currencies and U.S. dollars have fluctuated significantly in recent years and may continue to do so. In addition, we generate revenue from export sales and operations conducted outside the United States that may be denominated in currencies other than the relevant functional currency.

 

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Executive Officers
The following table shows information about our executive officers as of February 17, 2010:
             
    Year First Became an    
Name, Age and Position   Executive Officer of   Other Business Experience Since
with Solutia   Solutia   At Least January 1, 2005
Jeffry N. Quinn, 51
President, Chief
Executive Officer and
Chairman of the Board
    2003     President, Chief Executive Officer and Director since May 2004. Named Chairman of the Board on February 22, 2006. Mr. Quinn previously served as Solutia’s Senior Vice President, General Counsel and Chief Restructuring Officer from 2003 to 2004. Prior to joining Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice President, Chief Administrative Officer and General Counsel of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products. Premcor Inc. is now owned by Valero Energy Corp.
 
           
James M. Sullivan, 49
Executive Vice
President, Chief
Financial Officer and
Treasurer
    2004     Executive Vice President, Chief Financial Officer and Treasurer since 2009. Mr. Sullivan served as Senior Vice President, Chief Financial Officer and Treasurer from 2004 through 2009 and as Vice President and Controller from 1999 through 2004.
 
           
James R. Voss, 43
Executive Vice
President, Global
Operations
    2005     Executive Vice President, Global Operations since 2009. Mr. Voss served as Senior Vice President and President, Flexsys from 2007 through 2009 and as Senior Vice President, Business Operations from 2005 through 2007. Mr. Voss served as Senior Vice President and Chief Administrative Officer of Premcor Inc., now owned by Valero Energy Corp.
 
           
Robert T. DeBolt, 49
Senior Vice President,
Business Operations
    2007     Senior Vice President, Business Operations since 2007. Mr. DeBolt served as Vice President of Corporate Strategy from 2005 to 2007 and as the Controller for Integrated Nylon from 2003 through 2004. Prior thereto, Mr. DeBolt was responsible for accounting at all of our manufacturing facilities.
 
           
Paul J. Berra, III, 41
Senior Vice President,
General Counsel, Legal
and Governmental
Affairs
    2008     Senior Vice President, General Counsel, Legal and Governmental Affairs since December 2009. Mr. Berra served as Senior Vice President, General Counsel and Chief Administrative Officer from 2008. Mr. Berra served as Vice President, Government Affairs and Communications from 2006-2008. Mr. Berra joined Solutia in 2003 as Assistant General Counsel, Human Resources, and added government affairs responsibilities the following year. Prior to joining Solutia, Mr. Berra served as Corporate Counsel at Premcor Inc., now owned by Valero Energy Corp.
 
           
Timothy J. Spihlman, 38
Vice President and
Corporate Controller
    2004     Vice President and Corporate Controller since 2004 and Director, Corporate Analysis and Financial Reporting from 2002 through 2004. Previously, Mr. Spihlman served as Vice President of Finance at CoreExpress, Inc. from 2000 until 2002 and was a public accountant with Ernst & Young from 1993 until 2000.
 
           
Andrew B. Stroud, Jr., 51
Vice President, Human
Resources
    2010     Mr. Stroud was Executive Vice President, DHR International, a privately held provider of executive search solutions from August 2008 until December 2009, when he joined Solutia. He was Vice President, Human Resources for Insituform Technologies, a leading worldwide provider of cured-in place pipe (CIPP) and other technologies and services for the rehabilitation of pipeline systems. Previously, he served as Vice President, Human Resources of Aramark Corporation, a food services, facilities management, and uniform and career apparel provider from 2004. Mr. Stroud has over twenty years of experience in Human Resources.
The above listed individuals are elected to the offices set opposite their names to hold office until their successors are duly elected and have qualified, or until their earlier death, resignation or removal.
Internet Access to Information
Our Internet address is www.solutia.com. We make available free of charge through our Internet website our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). All of these materials may be accessed from the “Investors” section of our website, www.solutia.com. These materials may also be accessed through the SEC’s website (www.sec.gov) or in the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

 

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ITEM 1A.  
RISK FACTORS
IN EVALUATING US, CAREFUL CONSIDERATION SHOULD BE GIVEN TO THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM 10-K. ALTHOUGH THESE RISK FACTORS ARE MANY, THESE FACTORS SHOULD NOT BE REGARDED AS CONSTITUTING THE ONLY RISKS ASSOCIATED WITH OUR BUSINESSES. EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND/OR FINANCIAL CONDITION. IN ADDITION TO THE FOLLOWING DISCLOSURES, PLEASE REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES. UNLESS OTHERWISE NOTED, ALL RISK FACTORS LISTED BELOW SHOULD BE CONSIDERED ATTRIBUTABLE TO ALL OUR OPERATIONS INCLUDING ALL OPERATIONS CLASSIFIED AS DISCONTINUED.
RISK RELATED TO OUR EMERGENCE FROM BANKRUPTCY
Because our consolidated financial statements reflect fresh-start accounting adjustments made upon emergence from bankruptcy, and because of the effects of the transactions that became effective pursuant to the Plan of Reorganization, financial information in our future financial statements will not be comparable to our financial information from prior periods.
Upon our emergence from Chapter 11 in February 2008, we adopted fresh-start accounting in accordance with Accounting Standards Codification (“ASC”) 852, Reorganizations, pursuant to which our reorganization value, which represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, has been allocated to the fair value of assets in conformity with ASC 805, Business Combinations, using the purchase method of accounting for business combinations. We stated liabilities, other than deferred taxes, at a present value of amounts expected to be paid. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets is reflected as goodwill, which is subject to periodic evaluation for impairment. In addition, under fresh-start accounting the accumulated deficit has been eliminated. In addition to fresh-start accounting, our consolidated financial statements reflect all effects of the transactions contemplated by the Plan of Reorganization. Thus, our future statements of financial position and statements of operations data will not be comparable in many respects to our consolidated statements of financial position and consolidated statements of operations data for periods prior to our adoption of fresh-start accounting and prior to accounting for the effects of the reorganization.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Continued extreme disruption in global financial markets and sustained weakening in our markets could significantly impact our results of operations, liquidity and long term anticipated growth rate.
Our operations and performance are materially affected by worldwide economic conditions, which started deteriorating significantly during 2008 and continued into 2009. Market turmoil and tightened credit availability, downgrades of certain investments and declining valuations of others generally reduced consumer confidence, increased pricing pressure on products and services and led to widespread reduction of global business activity. Uncertainty about current global economic conditions has resulted in decreased consumer spending and a significant decline in sales in automotive, aviation, construction and industrial industries worldwide. The continued tightening of credit in financial markets adversely affects the ability of customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products, our ability to procure necessary raw materials from suppliers, our ability to secure credit from our suppliers at terms granted to us historically and our ability to collect from our customers amounts due on trade receivables at terms previously experienced by us. The continued weakening of these markets, if prolonged, could significantly impact our results of operations, our liquidity, and our long-term anticipated growth rate. Further, stemming from our emergence from Chapter 11, the carrying amount of our goodwill and intangible assets was established at fair value as of February 28, 2008 and therefore is more susceptible to impairment if business operation results and/or macroeconomic conditions deteriorate. Impairment charges, if any, could be material to our results of operations. While we have seen signs of recovery and increased demand in most businesses, continued weakness in worldwide economic conditions could result in a decline in our future profitability and cash from operating activities.

 

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Our operations are restricted by our credit facilities and could be impacted by the failure of our lenders to perform.
Our credit facilities and our indenture governing the 2017 senior unsecured notes include a number of significant restrictive covenants. These covenants could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:
   
incur additional debt;
 
   
make certain investments and acquisitions;
 
   
enter into certain types of transactions with affiliates;
 
   
limit dividends or other payments by us and certain of our subsidiaries;
 
   
use assets as security in other transactions;
 
   
pay dividends on our common stock or repurchase our equity interests;
 
   
sell certain assets or merge with or into other companies;
 
   
guarantee the debts of others;
 
   
enter into new lines of business;
 
   
make capital expenditures;
 
   
prepay, redeem or exchange our debt;
 
   
form any joint ventures or subsidiary investments.
In addition, our current credit facilities require us to satisfy certain financial covenants. These financial covenants and tests could limit our ability to react to market conditions or satisfy extraordinary capital needs and could otherwise restrict our financing and operations.
Our ability to comply with the covenants and other terms of our debt obligations will depend on our future operating performance. If we fail to comply with such covenants and terms, we would be required to obtain waivers from our lenders to maintain compliance with our debt obligations. If we are unable to obtain any necessary waivers and the debt is accelerated, a material adverse effect on our financial condition and future operating performance would result.
Our current revolving credit facility is a syndicated credit agreement in which each lender is severally liable for only its agreed part of the loan commitments. Although all lenders have performed their individual obligations under the terms of the revolving credit agreement to date, there can be no assurance that this will continue given the current turmoil in the financial services industry. One or more lender’s failure to perform on their obligations could have a material adverse effect on the Company’s ability to fund its ongoing operations and other commitments.
Volatility in the prices of raw materials and energy or their reduced availability could significantly impact our operating margins.
Our manufacturing processes consume significant amounts of energy and large amounts of commodity raw materials, including benzene, vinyl acetate, sulfur, polyvinyl alcohol, 2-ethyl hexanol and natural gas, the cost of which are subject to worldwide supply and demand as well as other factors beyond our control. Also, temporary shortages or over supply of these raw materials and energy sources may occasionally occur. We typically purchase major requirements for key raw materials under medium-term contracts. Pricing under these contracts may fluctuate as a result of unscheduled plant interruptions, worldwide market conditions and government regulation. Volatile raw material and energy costs could impact our operating margins in the future. See also Business — Raw Materials and Energy Resources.

 

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Problems encountered in operating our production facilities could adversely impact our business.
Our production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unscheduled down time and environmental hazards. From time to time in the past, we have had incidents that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for workplace injuries and fatalities. We are dependent upon the continued safe operation of our production facilities.
In addition, some of our products involve the manufacture or handling of a variety of reactive, explosive and flammable materials. Use of these products by our employees, customers and contractors could result in liability to us if an explosion, fire, spill or other accident were to occur.
We have and will continue to have significant indebtedness.
We have and will continue to have a significant amount of indebtedness. Our significant indebtedness could have important consequences, including the following:
   
We will have to dedicate a significant portion of our cash flow to making interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions or other general corporate purposes.
   
Certain levels of indebtedness may make us less attractive to potential acquirers or acquisition targets.
   
Certain levels of indebtedness may limit our flexibility to adjust to changing business and market conditions, and make us more vulnerable to downturns in general economic conditions as compared to competitors that may be less leveraged.
   
As described in more detail above, the documents providing for our indebtedness contain restrictive covenants that may limit our financing and operational flexibility.
Furthermore, our ability to satisfy our debt service obligations will depend, among other things, upon fluctuations in interest rates, our future operating performance and ability to refinance indebtedness when necessary. These factors depend partly on economic, financial, competitive and other factors beyond our control. We have hedged a significant portion of our variable rate debt with derivative instruments. We may not be able to generate sufficient cash from operations to meet our debt service obligations as well as fund necessary capital expenditures, pension funding obligations and investments in research and development. In addition, if we need to refinance our debt, obtain additional financing or sell assets or equity, we may not be able to do so on commercially reasonable terms, if at all. Finally, counterparties to our derivative instruments may not be able to honor their contractual obligations.
The utilization of our net deferred tax assets could be substantially limited if we experienced an ownership change as defined by the Internal Revenue Code.
As of December 31, 2009, we have net deferred tax assets of $555 million related to our U.S. net operating loss (“NOL”) carryforward and $125 million related to our U.S. foreign tax credit (“FTC”) carryforward. We have recorded a valuation allowance of equal amount against each of these assets. Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its NOL and FTC carryforwards. Under the rules, such an ownership change is generally any change in ownership of more than 50% of its stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company.
If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, our ability to use any of our NOL and FTC carryforwards, at the time of the ownership change would be subject to the limitations of Section 382. The limitation could operate to cause the benefit of the assets to expire before they are utilized. Our inability to use the full benefits of our NOL and FTC carryforwards could have a material effect on our financial position, results of operations and cash flow.

 

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We believe we have not experienced a subsequent ownership change since we experienced an initial ownership change on February 28, 2008, the date we emerged from Chapter 11 bankruptcy. However, the amount by which our ownership may change in the future could be affected by purchases and sales of common stock by 5% stockholders over which we have no control, and new issuances of common stock by us, should we choose to do so. In July 2009, our Board of Directors adopted a Section 382 rights agreement as a measure intended to deter such an ownership change in order to preserve our deferred tax assets. The Section 382 rights agreement, however, may not prevent an ownership change. In addition, while the Section 382 rights agreement is in effect, it could discourage or prevent a merger, tender offer, proxy contest or accumulations of substantial blocks of shares for which some stockholders might receive a premium above market value. It could also adversely affect the liquidity of the market for our shares.
Turnover in the senior management team and losses of other key personnel could have a significant adverse effect on our results of operations.
The services of our senior management team, as well as other key personnel, will be critical to the successful implementation of our business strategies going forward. If the terms of incentive compensation programs are not adequate, we may have difficulty retaining current senior management and other key personnel and be unable to hire qualified personnel to fill any resulting vacancies, which could have a significant adverse effect on our results of operations.
We operate in a highly competitive industry that includes competitors with greater resources than ours.
The markets in which we compete are highly competitive. Competition in these markets is based on a number of factors, such as price, product, quality and service. Some of our competitors may have greater financial, technological and other resources and may be better able to withstand changes in market conditions. In addition, some of our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than us. Consolidation of our competitors or customers may also adversely affect our businesses. Furthermore, global competition and customer demands for efficiency will continue to make price increases difficult.
We operate in cyclical business segments and our financial results are likely to fluctuate accordingly.
We operate in cyclical business segments. Specifically, a substantial portion of our sales are to customers involved, directly or indirectly, in the housing and automotive industries, both of which are, by their nature, cyclical industries. A downturn in either or both of these industries would and has resulted in lower demand for our products among customers involved in those industries and a reduced ability to pass on cost increases to these customers.
If we are unable to protect our intellectual property rights, our sales and financial performance could be adversely affected.
We own a large number of patents that relate to a wide variety of products and processes and have a substantial number of patent applications pending. We own a considerable number of established trademarks in many countries under which we market our products. These patents and trademarks in the aggregate are of material importance to the operations of our businesses. Our performance may depend in part on our ability to establish, protect and enforce such intellectual property and to defend against any claims of infringement, which could involve complex legal, scientific and factual questions and uncertainties.
In the future, we may have to rely on litigation to enforce our intellectual property rights and contractual rights. In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we had been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable period of time. If we are unable to obtain licenses on reasonable terms, we may be forced to cease selling or using any of our products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and may be time-consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and diversions of some of our resources. Our intellectual property rights may not have the value that we believe them to have, which could result in a competitive disadvantage or adversely affect our business and financial performance. See also Business — Intellectual Property.

 

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Legal proceedings including proceedings related to environmental and other regulatory obligations may have a materially negative impact on our future results of operations.
We have been, and may in the future be, subject to various lawsuits and other legal proceedings, including proceedings related to our environmental and other regulatory obligations. As a manufacturer of chemical-based materials, we may become subject to litigation alleging personal injury, or product liability associated with our products and businesses. Adverse judgments or rulings against us in these legal proceedings, or the filing of additional environmental or other damage claims against us, may have a materially negative impact on our future results of operations, cash flows and financial condition. Additionally, we may incur significant administrative and legal costs associated with defending or settling litigation.
The applicability of numerous environmental laws to our manufacturing facilities and other locations could cause us to incur material costs and liabilities.
We are subject to extensive federal, state, local and foreign environmental, safety and health laws and regulations concerning, among other things, emissions to the air, discharges to land and water and the generation, handling, treatment and disposal of hazardous waste and the distribution of chemical substances. We are also required to maintain various environmental permits and licenses, many of which require periodic modification and renewal and related governmental approvals. Our operations entail the risk of violations of these laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
In addition, these requirements and their enforcement may become more stringent in the future. Non-compliance with such future requirements could subject us to material liabilities, such as government fines, third-party lawsuits or the suspension of non-compliant operations. Future requirements may also result in our making significant site or operational modifications at substantial cost. Future regulatory and enforcement developments could also restrict or eliminate our ability to continue to manufacture certain products or could require us to make modifications to our products.
At any given time, we are involved in litigation, administrative proceedings and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with contaminated sites, natural resource damages, property damages and personal injury. For example, during our Chapter 11 case, natural resource trustees asserted certain natural resource damage claims against us principally relating to our Anniston and Sauget facilities, the liability for which we share with the Monsanto Company (“Monsanto”) pursuant to our Plan. We may be required to spend substantial sums to defend or settle these and other actions, to pay any fines levied against us or satisfy any judgments or other rulings rendered against us and such sums may be material.
Under certain environmental laws, we can be held strictly liable for hazardous substance contamination at real property we have owned, operated or used as a disposal site or for natural resource damages associated with such contamination. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party can be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. As described in more detail above and in the following paragraph, we could incur significant costs, including cleanup costs, natural resources damages, civil or criminal fines and sanctions and third-party claims as a result of hazardous substance contamination.
We have made and will continue to make substantial expenditures for environmental and regulatory compliance and remediation projects. The substantial amounts that we may be required to spend on environmental capital projects and programs could cause substantial cash outlays and, accordingly, could have a material effect on our consolidated financial position, liquidity and profitability or limit our financial and operating flexibility. In addition, although we believe that we have correctly budgeted and, to the extent appropriate under applicable accounting principles, reserved for these amounts, factors beyond our control may render these budgeted and reserved amounts inadequate. These factors include changing governmental policies and regulations; the commencement of new governmental proceedings or third party litigation regarding environmental remediation; new releases of hazardous substances that result in personal injury, property damage or harm to the environment; and the discovery of unknown conditions of contamination or unforeseen problems encountered in the environmental remediation programs.

 

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Our Chapter 11 case was caused, in significant part, by an accumulation of legacy liabilities, including, among others, “legacy environmental liability” arising from historical operations of Pharmacia prior to the Solutia Spinoff. In the course of the Chapter 11 case we achieved a substantial reallocation of the risk from these legacy liabilities. In particular, pursuant to the settlement agreement entered into between Monsanto and us, Monsanto agreed to be financially responsible for remediation costs and other environmental liabilities for sites owned, operated or used by Pharmacia but never owned, operated or used by us after the Solutia Spinoff; to share liabilities with respect to offsite areas at the Sauget and Anniston plant sites; and to be financially responsible for personal injury and property damage claims associated with exposures to hazardous substances arising from legacy Pharmacia operations (so-called “Legacy Toxic Tort Claims”). If Monsanto and/or Pharmacia fail to honor their respective obligation with respect to such remediation costs or Legacy Toxic Tort Claims, we could become responsible for some or all of such liabilities except for the remediation costs and other environmental liabilities for sites owned, operated or used by Pharmacia but never owned, operated or used by us for which Solutia received a discharge under the Plan which liabilities could be material. See also Management’s Discussion and Analysis — Environmental Matters.
We face currency and other risks associated with international sales.
Sales and operations outside the United States constituted a majority of our revenues in fiscal 2009. Our operations outside the United States expose us to risks including fluctuations in currency values, trade restrictions, tariff and trade regulations, U.S. export controls, reduced protection of intellectual property rights; foreign tax laws, shipping delays, economic and political instability; the effect of global health, safety and environmental matters on economic conditions and market opportunities and changes in financial policy.
The functional currency of each of our non-U.S. operations is generally the local currency. Exchange rates between some of these currencies and U.S. dollars have fluctuated significantly in recent years and may do so in the future. It is possible that fluctuations in foreign exchange rates will have a negative effect on our results of operations.
Many of our products and manufacturing processes are subject to technological change and our business will suffer if we fail to keep pace.
Many of the markets in which our products (and their corresponding manufacturing processes) compete are subject to technological change and new product introductions and enhancements. We must continue to enhance our existing products and to develop and manufacture new products with improved capabilities to continue to be a market leader. We must also continue to make improvements in our manufacturing processes and productivity to maintain our competitive position. When we invest in new technologies, processes or production facilities, we will face risks related to construction delays, cost over-runs and unanticipated technical difficulties related to start-up. Our inability to anticipate, respond to, capitalize on or utilize changing technologies could have an adverse effect on our consolidated results of operations, financial condition and cash flows in any given period.
Significant payments may be required to maintain the funding of our domestic qualified pension plans.
We maintain qualified pension plans under which certain of our domestic employees and retirees are entitled to receive benefits. Although we have frozen future benefit accruals under our U.S. pension plans, significant liabilities still remain. In order to fund these pension plans, we made significant contributions in 2009 amounting to approximately $65 million and will have to fund more going forward. We may be unable to obtain financing to make these pension plan contributions. In addition, even if financing for these contributions is obtained, the funding obligations and the carrying costs of debt incurred to fund the obligations could have a significant adverse effect on our results of operations.
Labor disruptions with the unionized portion of our workforce could have a negative effect.
While we believe that our relations with our employees are good, we may not be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could impact our ability to satisfy our customers’ requirements and negatively affect our financial condition.

 

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We may engage in acquisitions that could disrupt our business and harm our operating results or financial condition.
We expect to make selective domestic and international acquisitions of and investments in businesses that represent synergistic bolt-ons to our existing businesses or represent one or more businesses in the performance material and specialty chemical sector that would be new platforms for the Company. We may not be able to identify suitable acquisition, investment, alliance, or joint venture opportunities or consummate any such transactions or relationships on terms and conditions acceptable to us. Further, notwithstanding thorough pre-acquisition due diligence and careful analysis performed by the Company, we may not have identified all possible issues that might arise with respect to such acquired assets and such transaction that we enter into may not be as successful as the Company’s premises as of the acquisition date.
These transactions or any other acquisitions or dispositions involve risks and uncertainties, which may have a material adverse effect on our business. A critical component of the success of certain acquisitions is the Company’s ability to quickly and effectively integrate the acquired business or businesses into Solutia. Notwithstanding the fact that the Company’s integration of the 2007 acquisition of Flexsys was successful in terms of timeliness of the integration and resulting cost savings realized, the integration of future acquired businesses may not be as successful given the complexities involved in such activities. Also, these integration efforts could result in disruption to other parts of our business and the diversion of management’s attention from daily operations.
Any acquisition may also cause us to assume liabilities, record goodwill and indefinite-lived intangible assets that will be subject to impairment testing and potential impairment charges, incur significant restructuring charges and increased working capital and capital expenditure requirements, which would reduce our return on invested capital.
Changes in supply-demand balance in the regions and the industries in which we operate may adversely affect our financial results.
Our key markets are shifting from mature markets such as North America and Western Europe to emerging regions such as Asia, in particular China and India. Although we are responding to meet these market demand conditions, we cannot be certain that we will be successful in expanding capacity in emerging regions (which depends in part on economic and political conditions in these regions and, in some cases, on our ability to acquire or form strategic business alliances) or in reducing capacity in mature regions commensurate with industry demand.
Failure to make continued improvements in our technology and productivity could hurt our competitive position.
We believe that we must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be a market leader. We also believe that we must continue to make improvements in our productivity in order to maintain our competitive position. When we invest in new technologies, processes or production facilities, we face risks related to construction delays, cost over-runs and unanticipated technical difficulties. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and our consolidated results of operations.
ITEM 1B.  
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.  
PROPERTIES
We lease the property on which our headquarters is located in St. Louis County, Missouri. Our principal European offices are located in Louvain-la-Neuve, Belgium, on land leased from the University of Louvain. For our Asia Pacific operations, we lease offices in Shanghai, China and other locations in the region. Information about our major manufacturing locations worldwide and segments that used these locations as of February 1, 2010, appears under “Segments; Principal Products” in Item 1 of this report and is incorporated herein by reference.
Our principal plants are suitable and adequate for their use. Utilization of these facilities varies with seasonal, economic and other business conditions. None of our principal plants are substantially idle. Our facilities generally have sufficient capacity for existing needs and expected near-term growth.

 

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We own most of our principal plants. However, at Antwerp, Belgium and Sao Jose dos Campos, Brazil, both of which belong to Monsanto, we own certain buildings and production equipment and lease the underlying land. We operate as a guest at these facilities with Monsanto as the operator under terms of master operating agreements. For facilities used in the manufacture of Saflex products, the master operating agreement has 9 years remaining on its initial term. For facilities used to manufacture rubber chemical products, the master operating agreement has 15 years remaining on its initial term. After the initial terms, the master operating agreements for both manufacturing facilities and each of the product lines provide that they continue indefinitely unless either party terminates on at least 24 months’ prior written notice. The master operating agreements also provides that, under certain circumstances, either the operator or the guest may terminate the operating agreement before the expiration of the applicable term, subject to early termination penalties.
In addition, we lease and operate as a guest at manufacturing facilities in Lemoyne, Alabama and Itupeva, Brazil, under master operating agreements with Akzo Nobel as the operator where we manufacture certain rubber chemical products. The initial term of these master operating agreements run until 2027. The master operating agreements may be terminated by either party upon 24 months notice, which notice shall not be effective before the expiration of the initial term.
We operate several facilities for other third parties on our sites, principally within the Nienburg, Germany; Sauget, Illinois; Newport, Wales (U.K.); and Springfield, Massachusetts sites under long-term lease and operating agreements.
Mortgages on our plants at the following locations constitute a portion of the collateral securing our Term Loan and Revolver credit facilities: Springfield, Massachusetts; Trenton, Michigan; and Martinsville, Virginia.
ITEM 3.  
LEGAL PROCEEDINGS
Litigation
We are a party to legal proceedings, which have arisen in the ordinary course of business and involve claims for money damages.
Except for the potential effect of an unfavorable outcome with respect to our Legacy Tort Claims Litigation, it is our opinion that the aggregate of all claims and lawsuits will not have a material adverse impact on our consolidated financial statements.
Legacy Tort Claims Litigation
Pursuant to the Amended and Restated Settlement Agreement effective February 28, 2008, entered into by Solutia and Monsanto in connection with our emergence from Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is responsible to defend and indemnify Solutia for any Legacy Tort Claims as that term is defined in the agreement, while Solutia retains responsibility for tort claims arising out of exposure occurring after the Solutia Spinoff. Solutia or Flexsys have been named as defendants in the following actions, and have submitted the matters to Monsanto as Legacy Tort Claims. However, to the extent these matters relate to post Solutia Spinoff exposure or such matters are not within the meaning of “Legacy Tort Claims” within the Monsanto Settlement Agreement, we would potentially be liable. All claims in the Flexsys tort litigation matters described below concern alleged conduct occurring while Flexsys was a joint venture of Solutia and Akzo Nobel, and any potential damages in these cases would be evenly apportioned between Solutia and Akzo Nobel. In addition to the below actions, Monsanto has sought indemnity from us for certain tort and workers’ compensation claims in which Monsanto has been named a defendant. We have rejected such demand pursuant to the Monsanto Settlement Agreement. There are no pending legal actions regarding these alleged indemnification rights.
Putnam County, West Virginia Litigation. In December 2004, a purported class action lawsuit was filed in the Circuit Court of Putnam County, West Virginia against Flexsys, Pharmacia, Monsanto and Akzo Nobel (Solutia is not a named defendant) alleging exposure to dioxin from Flexsys’ Nitro, West Virginia facility, which is now closed. The relevant production activities at the facility occurred during Pharmacia’s ownership and operation of the facility and well prior to the creation of the Flexsys joint venture between Pharmacia (whose interest was subsequently transferred to us in the Solutia Spinoff) and Akzo Nobel. The plaintiffs are seeking damages for loss of property value, medical monitoring and other equitable relief.
Beginning in February 2008, Flexsys, Monsanto, Pharmacia, Akzo Nobel and another third party were named as defendants in approximately seventy-five individual lawsuits, and Solutia was named in two individual lawsuits, filed in various state court jurisdictions by residents or former residents of Putnam County, West Virginia. The largely identical complaints allege that the residents were exposed to potentially harmful levels of dioxin particles from the Nitro facility. Plaintiffs did not specify the amount of their alleged damages in their complaints. In 2009, over fifty additional nearly identical complaints were filed by individual plaintiffs in the Putnam County area, which named Solutia, Flexsys, Monsanto and Pharmacia as defendants.

 

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Escambia County, Florida Litigation. In June 2008, a group of approximately fifty property owners and business owners in the Pensacola, Florida area filed a lawsuit in the Circuit Court for Escambia County, Florida against Monsanto, Pharmacia, Solutia, and the plant manager at Solutia’s former Pensacola plant, which was included in the sale of our Integrated Nylon business. The lawsuit, entitled John Allen, et al. v. Monsanto Company, et al., alleges that the defendants are responsible for elevated levels of PCBs in the Escambia River and Escambia Bay due to past and allegedly continuing releases of PCBs from the Pensacola plant. The plaintiffs seek: (1) damages associated with alleged decreased property values caused by the alleged contamination, and (2) remediation of the alleged contamination in the waterways. Plaintiffs did not specify the amount of their alleged damages in their complaint.
St. Clair County, Illinois Litigation. In February 2009, a purported class action lawsuit was filed in the Circuit Court of St. Clair County, Illinois against Solutia, Pharmacia, Monsanto and two other unrelated defendants alleging the contamination of their property from PCBs, dioxins, furans, and other alleged hazardous substances emanating from the defendants’ facilities in Sauget, Illinois (including our W.G. Krummrich site in Sauget, Illinois). The proposed class is comprised of residents who live within a two-mile radius of the Sauget facilities. The plaintiffs are seeking damages for medical monitoring and the costs associated with remediation and removal of alleged contaminants from their property.
In addition to the purported class action lawsuit, twenty additional individual lawsuits have been filed since February 2009 against the same defendants (including Solutia) comprised of claims from over one thousand individual residents of Illinois who claim they suffered illnesses and/or injuries as well as property damages as a result of the same PCB’s, dioxins, furans, and other alleged hazardous substances allegedly emanating from the defendants’ facilities in Sauget.
Upon assessment of the terms of the Monsanto Settlement Agreement and other defenses available to us, we believe the probability of an unfavorable outcome to us on the Putnam County, West Virginia, Escambia County, Florida, and St. Clair County, Illinois litigation against us is remote and, accordingly, we have not recorded a loss contingency. Nonetheless, if it were subsequently determined these matters are not within the meaning of “Legacy Tort Claims,” as defined in the Monsanto Settlement Agreement, or other defenses to us were unsuccessful, it is reasonably possible we would be liable for an amount which cannot be estimated but which could have a material adverse effect on our consolidated financial statements.
Solutia Inc. Employees’ Pension Plan Litigation
Starting in October 2005, separate purported class action lawsuits were filed by current or former participants in our U.S. Pension Plan (the “U.S. Plan”), which were ultimately consolidated in September 2006 into a single case. The Consolidated Class Action Complaint alleged three separate causes of action against the U.S. Plan: (1) the U.S. Plan violates ERISA by terminating interest credits on prior plan accounts at the age of 55; (2) the U.S. Plan is improperly backloaded in violation of ERISA; and (3) the U.S. Plan is discriminatory on the basis of age. In September 2007, the court dismissed the plaintiffs’ second and third claims, and by consent of the parties, certified a class action against the U.S. Plan only with respect to plaintiffs’ claim that the U.S. Plan violates ERISA by allegedly terminating interest credits on prior plan accounts at the age of 55. On June 11, 2009, the United States District Court for the Southern District of Illinois entered a summary judgment in favor of the U.S. Plan on the sole remaining claim against the U.S. Plan. The District Court entered its final appealable judgment in the case on September 29, 2009.

 

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Medicare Reimbursement Litigation
In December 2009, the Department of Justice (“DOJ”), on behalf of the United States government, filed suit in the United States District Court, Northern District of Alabama (in a case captioned United States of America v. Stricker, et al.), against Solutia, Monsanto, Pharmacia, and the attorneys and law firms who represented the plaintiffs in Abernathy v. Solutia Inc., et al. (“Abernathy”) lawsuit arising out of PCB contamination in Anniston, Alabama. The DOJ alleges the defendants failed to reimburse Medicare for medical expenses paid to Abernathy settlement recipients who were Medicare beneficiaries. Specifically, the DOJ claims that approximately 907 claimants who received payments for medical treatment under the Abernathy settlement were Medicare beneficiaries who received “conditional” payments from Medicare for the same treatment. The DOJ alleges that the conditional payments were subject to reimbursement if a primary payer had responsibility to cover the treatment at issue, but no reimbursement was made to the government by any of the Abernathy participants. The DOJ is seeking recovery of these allegedly unpaid reimbursements from the defendants who paid into the Abernathy settlement fund, as well as the plaintiffs’ counsel who represented the Medicare recipients and were responsible for the distribution of the settlement funds. The DOJ did not specify the amount of damages — either generally from the defendants or specifically from Solutia — which the government seeks in this case.
Solutia denies the allegations, and asserts that liability for such reimbursements should be the responsibility of the plaintiffs’ counsel who were actually responsible for the distribution of the settlement funds to the plaintiffs. Defendants’ initial responses to the claim are due in February 2010, and no trial is expected until at least 2011.
Flexsys Patent and Related Litigation
Flexsys holds various patents covering inventions in the manufacture of rubber chemicals, including patents describing and claiming a manufacturing process for 4-aminodiphenylamine ("4-ADPA"), a key building block for the manufacture of 6PPD and IPPD, as well as a manufacturing process for 6PPD and IPPD, which function as anti-degradants and are used primarily in the manufacture of rubber tires. Flexsys is engaged in litigation in several jurisdictions to protect and enforce its patents.
United States Civil Patent Infringement Litigation. In January 2005, Flexsys filed suit in United States District Court for the Northern District of Ohio for patent infringement against Sinorgchem Co. Shangdong, a Chinese entity ("Sinorgchem"), Korea Kumho Petrochemical Company, a Korean company ("KKPC"), Kumho Tire Korea and Kumho Tire USA. Flexsys claims the process Sinorgchem uses to make 4-ADPA and 6PPD infringes Flexsys' patented process, and that Sinorgchem's importation of 6PPD, KKPC's importation of 6PPD (which is made from Sinorgchem's 4-ADPA), and Kumho Tire's importation of tires (which include KKPC's 6PPD) infringe upon Flexsys' patents. The lawsuit was stayed for an extended period of time while Flexsys pursued parallel infringement proceedings against Sinorgchem and KKPC before the United States International Trade Commission. Although Flexsys initially had success in the ITC action, the underlying decision was overturned by the Federal Circuit Court of Appeals which held that Sinorgchem and KKPC did not literally infringe Flexsys' patents. Flexsys did not pursue further appeals in the ITC matter, and, instead, decided to continue its pursuit of its civil patent infringement action in Ohio. In February 2009, the district court lifted the stay on the civil case and allowed the case to go forward. Flexsys is seeking monetary damages as well as injunctive relief in the civil case. In October 2009, the court held a hearing to determine the interpretation of the patent claims at issue in the case. In its subsequent ruling, the court limited the claims Flexsys could bring with respect to its base patent. Sinorgchem and KKPC have recently filed summary judgment motions asking the court to dismiss the case as a matter of law. If summary judgment is denied, trial on this matter is scheduled for the second quarter of 2011.
Rubber Chemicals Antitrust Litigation. In April 2006, KKPC filed suit against Flexsys in the United States District Court for the Central District of California for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, intentional interference with prospective economic advantage, disparagement and violations of the California Business & Professions Code. This matter was subsequently transferred to the United States District Court, Northern District of California. In its complaint, KKPC primarily claimed Flexsys' alleged statements to customers regarding Flexsys' belief that KKPC's products infringed upon Flexsys' patents were in violation of antitrust laws. The court dismissed KKPC's initial complaint, but granted KKPC the right to refile an amended complaint, which KKPC filed in September 2007. Flexsys filed a motion to dismiss the amended complaint, which was granted in part, and denied in part. Specifically, the court dismissed all pending antitrust claims against Flexsys and dismissed the two state law claims for unfair competition and tortious interference without prejudice. The court granted KKPC the right to refile another amended complaint, which KKPC filed in April 2008 (which did not include the state law claims). Flexsys moved to dismiss the latest amended complaint, and its motion was granted in December 2008, thereby fully dismissing the case. KKPC has appealed the decision to the Ninth Circuit Court of Appeals, and a hearing was held in February 2010. A decision is expected in mid-2010.
Legal proceedings outside the United States. Various parties, including Sinorgchem and other competitors of Flexsys, have filed other separate actions in patent courts in Europe and Asia seeking to invalidate certain of Flexsys' patents issued in those jurisdictions. However, Flexsys has had substantial success in upholding the validity of its patents throughout the world. Specifically, on October 28, 2009, the Korean Patent Court rendered a decision finding an important group of claims within Flexsys' patents were valid, subverting attempts by Sinorgchem to invalidate the Korean patent. On January 25, 2010, the German Patent Court decided to maintain Flexsys' patent in Germany and to reject Sinorgchem's attempt to invalidate this patent. Additionally, on January 31, 2010, the Beijing Number 1 Intermediate People's Court rejected Sinorgchem's efforts to invalidate Flexsys' patent in China. Further, Sinorgchem has recently filed an action to invalidate Flexsys' patent in Japan. Flexsys will continue to defend its patent wherever it is challenged.
ITEM 4.  
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to our security holders during the fourth quarter of 2009.

 

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PART II
ITEM 5.  
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES
Market for Registrant’s Common Equity and Related Stockholder Matters
Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “SOA”. Our new common stock traded on a “when-issued” basis on the NYSE from December 20, 2007 until shortly after our emergence from Chapter 11 on February 28, 2008, at which time our new common stock began trading on a “regular way” basis. Upon emergence, all of our old common stock was cancelled in accordance with the Plan.
Because the value of one share of our old common stock bears no relation to the value of one share of our new common stock, only the trading prices of our new common stock following our listing on the NYSE are set forth below.
The following table sets forth the high and low sales prices per share of our new common stock for the period from February 28, 2008 through December 31, 2009.
                 
2008   High     Low  
First Quarter
  $ 15.97     $ 10.06  
Second Quarter
  $ 15.49     $ 11.09  
Third Quarter
  $ 17.29     $ 12.38  
Fourth Quarter
  $ 13.61     $ 3.64  
                 
2009   High     Low  
First Quarter
  $ 6.86     $ 1.18  
Second Quarter
  $ 6.49     $ 2.02  
Third Quarter
  $ 13.76     $ 5.64  
Fourth Quarter
  $ 13.05     $ 10.68  
On January 31, 2010, we had 5,278 shareholders of record.
No dividends were paid by us in the two months ended February 29, 2008 since we were prohibited by both the U.S. Bankruptcy Code and the debtor-in-possession (“DIP”) credit facility from paying dividends to shareholders. No dividends were paid by us in the ten months ended December 31, 2008 or twelve months ended December 31, 2009 and we have no current plans to do so.
Equity Compensation Plan Information
                         
                    Number of securities  
    (a)             remaining available for  
    Number of securities to be     Weighted-average     future issuance under  
    issued upon exercise of     exercise price of     equity compensation  
    outstanding options,     outstanding options,     plans (excluding  
Plan Category   warrants, and rights     warrants, and rights     securities reflected by (a))  
Equity compensation plans approved by security holders
                 
Equity compensation plans not approved by security holders
    1,901,959       17.21       1,713,528  
 
                       
Total
    1,901,959       17.21       1,713,528  

 

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Purchases of Equity Securities by the Issuer
                                 
                    Total Number of     Approximate Dollar  
                    Shares Purchased as     Value (in millions)  
    Total Number of             Part of Publicly     that May Yet Be  
    Shares     Average Price Paid     Announced Plans or     Purchased Under the  
Period   Purchased (1)     Per Share (2)     Programs     Plans or Programs  
October 1-31, 2009
    0     $ 0.00       0     $ 0  
November 1-30, 2009
    89     $ 11.02       0     $ 0  
December 1-31, 2009
    0     $ 0.00       0     $ 0  
 
                               
Total
    89     $ 11.02       0     $ 0  
     
(1)  
Shares surrendered to the Company by an employee to satisfy individual tax withholding obligations upon vesting of previously issued shares of restricted common stock.
 
(2)  
Average price paid per share reflects the closing price of Solutia common stock on the business date the shares were surrendered by the employee stockholder to satisfy individual tax withholding obligations upon vesting of restricted common stock.
Stock Performance Graph
The following graph shows the cumulative total stockholder returns (assuming reinvestment of dividends) following assumed investment of $100 in shares of new common stock that were outstanding on February 28, 2008, the date of our emergence from Chapter 11 bankruptcy. The indices shown below are included for comparative purposes only and do not necessarily reflect our opinion that such indices are an appropriate measure of the relative performance of our new common stock. Data for periods prior to February 28, 2008 is not shown because the period we were in Chapter 11 bankruptcy and the financial results of the Successor are not comparable with the results of the Predecessor.
Cumulative Total Returns
(PERFORMANCE GRAPH)

 

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ITEM 6.  
SELECTED FINANCIAL DATA
Financial Summary
                                                 
    Twelve Months     Ten Months     Two Months        
    Ended     Ended     Ended     Twelve Months Ended  
(Dollars and shares in millions,   December 31,     December 31,     February 29,     December 31,  
except per share amounts)   2009     2008     2008     2007     2006     2005  
 
                                               
Operating Results:
                                               
Net Sales
  $ 1,667     $ 1,775     $ 335     $ 1,643     $ 1,064     $ 1,003  
Gross Profit
  $ 470     $ 367     $ 94     $ 383     $ 271     $ 219  
As percent of net sales
    28 %     21 %     28 %     23 %     25 %     22 %
Operating Income (1)
  $ 233     $ 115     $ 49     $ 141     $ 69     $ 19  
As percent of net sales
    14 %     6 %     15 %     9 %     6 %     2 %
Income (Loss) from Continuing Operations Before Taxes
  $ 74     $ (2 )   $ 1,464     $ (252 )   $ (58 )   $ (5 )
Income (Loss) from Continuing Operations (2)
  $ 60     $ (15 )   $ 1,250     $ (269 )   $ (76 )   $ (14 )
Income (Loss) from Discontinued Operations, net of tax
  $ (169 )   $ (648 )   $ 204     $ 64     $ 80     $ 26  
Cumulative Effect of Change in Accounting Principle, net of tax (3)
                                  (3 )
Net Income attributable to noncontrolling interest
  $ 4     $ 5           $ 3     $ 2     $ 1  
Net Income (Loss) attributable to Solutia
  $ (113 )   $ (668 )   $ 1.454     $ (208 )   $ 2     $ 8  
 
                                               
Per Share Data:
                                               
Basic and Diluted Earnings (Loss) per Share from Continuing Operations attributable to Solutia (2)
  $ 0.53     $ (0.27 )   $ 11.96     $ (2.60 )   $ (0.75 )   $ (0.14 )
Basic Weighted Average Shares Outstanding
    106.5       74.7       104.5       104.5       104.5       104.5  
Diluted Weighted Average Shares Outstanding
    106.7       74.7       104.5       104.5       104.5       104.5  
Dividends per Share
                                   
 
                                               
Financial Position — Continuing Operations:
                                               
Total Assets
  $ 3,256     $ 3,244     $ 3,663     $ 1,832     $ 1,298     $ 1,217  
Liabilities not Subject to Compromise
  $ 2,616     $ 2,903     $ 3,315     $ 2,013     $ 1,350     $ 926  
Liabilities Subject to Compromise
  $     $     $     $ 1,922     $ 1,849     $ 2,176  
Long-Term Debt (4)
  $ 1,264     $ 1,359     $ 1,796     $ 359     $ 210     $ 247  
Shareholders’ Equity (Deficit)
  $ 600     $ 529     $ 1,043     $ (1,589 )   $ (1,399 )   $ (1,429 )
 
                                               
Other Data from Continuing Operations:
                                               
Working Capital (5)
  $ 484     $ 329     $ 492     $ (510 )   $ (393 )   $ (31 )
Interest Expense (6)
  $ 159     $ 141     $ 21     $ 134     $ 100     $ 79  
Income Tax Expense (7)
  $ 14     $ 13     $ 214     $ 17     $ 18     $ 9  
Depreciation and Amortization
  $ 107     $ 89     $ 11     $ 59     $ 46     $ 40  
Capital Expenditures
  $ 44     $ 84     $ 15     $ 99     $ 55     $ 49  
Employees (Year-End)
    3,400       3,700       3,700       3,700       2,900       3,400  
     
(1)  
Operating income  includes net restructuring (gains)/charges and other items of $32 million in 2009, $102 million in the ten months ended December 31, 2008 and ($2) million in the two months ended February 29, 2008, $41 million in 2007, ($7) million in 2006, and $14 million in 2005.
 
(2)  
Income (loss) from continuing operations includes net restructuring charges and other (gains)/charges of $70 million, or $0.66 per share in 2009, $79 million, or $1.06 per share in the ten months ended December 31, 2008, ($2) million, or ($0.02) per share in the two months ended February 29, 2008, $28 million, or $0.27 per share in 2007, $4 million, or $0.04 per share in 2006, and ($37) million, or ($0.35) per share in 2005.
 
(3)  
Change in accounting principle relates to the adoption of FASB Interpretation No. 47 Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143, guidance currently referenced in ASC 410 Asset Retirement and Environmental Obligations.
 
(4)  
Long-term debt excludes $659 million as of December 31, 2007 and $668 million as of December 31, 2006 and 2005 of debt classified as subject to compromise in accordance with ASC 852 Reorganizations, as a result of our Chapter 11 bankruptcy filing in 2003.
 
(5)  
Working capital is defined as total current assets less total current liabilities.
 
(6)  
Interest expense includes the recognition of interest on allowed secured claims as approved by the Bankruptcy Court of $8 million in 2007 and the write-off of debt issuance costs and debt discount of $38 million in 2009, $1 million in the ten months ended December 31, 2008 and $6 million in 2006 due to either the early repayment or early refinancing of the underlying debt facilities. In addition, interest expense in all periods is affected by interest expense allocated to discontinued operations and in all Predecessor periods for unrecorded contractual interest expense on unsecured debt subject to compromise.
 
(7)  
Income tax expense includes an increase (decrease) in valuation allowances of $23 million in 2009, $8 million in the ten months ended December 31, 2008, $(259) million in the two months ended February 29, 2008, $82 million in 2007, $35 million in 2006, and $18 million in 2005.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 for more information.

 

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ITEM 7.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global manufacturer and marketer of high-performance chemical-based materials that are used across automotive, construction, industrial and consumer applications. We report our operations in three segments: Saflex, CPFilms and Technical Specialties. Through our Saflex segment, we produce Polyvinyl Butyral (“PVB”) sheet used in the manufacture of laminated glass for automotive, architectural and solar applications in addition to the manufacture of specialized technical films for use in a wide variety of industrial applications. Our CPFilms segment manufactures, markets and distributes custom-coated window films for aftermarket automotive and architectural applications. Technical Specialties is our specialty chemicals segment, which includes the manufacture and sale of chemicals for the rubber, solar energy, process manufacturing and aviation industries. The major products by reportable segment are as follows:
     
Reportable Segment   Products
Saflex
 
    SAFLEX® plastic interlayer
 
 
    Specialty intermediate Polyvinyl Butyral resin and plasticizer
CPFilms
 
    LLUMAR®, VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional and retail window films
 
 
    Other enhanced polymer films for industrial customers
Technical Specialties
 
    CRYSTEX® insoluble sulphur
 
 
    SANTOFLEX® antidegradants
 
 
    SANTOCURE® and PERKACIT® primary and ultra accelerators
 
 
    THERMINOL® heat transfer fluids
 
 
    SKYDROL® aviation hydraulic fluids
 
 
    SKYKLEEN® brand of aviation solvents
See Note 19 — Segment and Geographic Data — to the accompanying consolidated financial statements for further information regarding our reportable segments.
Non-U.S. GAAP Financial Measures
Our emergence from bankruptcy required our adoption of fresh-start accounting on February 29, 2008. This resulted in our becoming a new reporting entity on March 1, 2008, which has a new capital structure and a new basis in the assets and liabilities assumed. Accordingly, the financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Solutia Inc. and its subsidiaries for the periods following March 1, 2008 (“Successor”), and of Solutia Inc. and its subsidiaries for the periods through February 29, 2008 (“Predecessor”). One impact resulting from the adoption of fresh-start accounting is the significant change in interest expense, taxes, depreciation and amortization as triggered by our requirement to institute a new capital structure and fully re-measure our tangible and identifiable intangible assets.
This discussion and analysis includes financial information prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) along with certain non-U.S. GAAP measures and presentation. These non-U.S. GAAP measures and presentation include the use of the financial measure EBITDA and the combined presentation of the Predecessor and Successor for the twelve months ended December 31, 2008. EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization less net income attributable to noncontrolling interest and reorganization items, net. The use of EBITDA by management, which is used to measure segment profit, enhances comparability between Successor and Predecessor periods, along with comparability with the performance of our peers. Likewise, we have combined the results of operations and the sources and uses of cash for the two months ended February 29, 2008 of the Predecessor and the ten months ended December 31, 2008 of the Successor, and compared these combined results with the corresponding periods in 2009 and 2007 to provide a more meaningful perspective on our financial and operational performance and trends than if we did not combine the results of operations and sources and uses of cash of the Predecessor and the Successor in this manner.

 

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The presentation of EBITDA and the combined results for the twelve months ended December 31, 2008 are intended to supplement investors’ understanding of our operating performance and liquidity. However, the use of EBITDA and the combined presentation of the twelve months ended December 31, 2008 are not intended to replace net income (loss), cash flows, financial position or comprehensive income (loss), as determined in accordance with U.S. GAAP for the Predecessor and Successor periods. The Consolidated Financial Statements on or after March 1, 2008 are not comparable to the Consolidated Financial Statements prior to that date.
Summary of Significant 2009 Events
Restructuring and Portfolio Realignment: The sharp decline in demand across the global construction, automotive and industrial markets realized in the fourth quarter 2008 continued into 2009. In order to mitigate the impact of a recessionary macroeconomic environment and the resulting weakened demand profile, we implemented immediate actions in early 2009 including the freezing of all salary and wages to the extent allowable, significantly reducing the payment of our 2008 annual incentive plan, suspension of our 2009 annual incentive plan and suspension of the employer 401(k) match to the extent allowable, reduction of capital expenditures to maintenance levels, temporary idling of certain lines and strict management of working capital. Further, a global restructuring initiative, which was targeted to increase the cost effectiveness of our support operations and reduce the operational personnel in alignment with near term production levels, was implemented throughout 2009 resulting in $35 million in restructuring charges necessary for severance and retraining costs for impacted employees along with future contractual payments related to the relocation of certain regional support operations from Singapore to Shanghai, China. In an effort to balance our North America production with customer demand, we closed our SAFLEXÒ plastic interlayer manufacturing line at our facility in Trenton, Michigan (“Trenton Facility”) in the first quarter 2009 and transferred the required production volume to our facility in Ghent, Belgium. In association with this action, we incurred an additional $5 million in restructuring charges in 2009, predominantly in the form of severance and retraining costs for impacted employees. The reduction of both salaried and union personnel from these actions resulted in a significant amount of lump sum distributions from our U.S. and Belgium pension plans requiring us to record a noncash settlement charge of $11 million in 2009.
As discussed in Note 4 — Acquisitions and Divestitures — to the accompanying consolidated financial statements, in the second quarter 2009, we completed the sale of substantially all the assets and certain liabilities, including environmental remediation and pension liabilities of active employees of our Integrated Nylon business. We used the proceeds from the sale to pay down debt under our Revolver. Completion of the sale of the Integrated Nylon business completes the transformation of Solutia into a pure-play performance materials and specialty chemicals company.
Long-term Capital Structure: Subsequent to the sale of the Integrated Nylon business, we significantly adjusted our long-term capital structure, including the underlying debt agreements and maturities, in an effort to better align our capital structure with our business portfolio and growth expectations. In the second quarter 2009, we completed a public offering of 24.7 million shares of common stock for $5.00 per share. Net proceeds, after deducting underwriting discounts and commissions, of $119 million were used to fully repay $74 million of long term debt and for general corporate purposes. In the fourth quarter 2009, we issued $400 million of senior unsecured notes, due 2017 (“2017 Notes”) at par bearing interest at 8.75 percent. Net proceeds were partially used to pay down $300 million of principal on our $1.2 billion senior secured term loan facility (“Term Loan”) which matures in 2014. Finally, we amended our Revolver and Term Loan credit agreements in order to provide greater operational and strategic flexibility in addition to increasing our liquidity and covenant cushion.
In the third quarter 2009, our Board of Directors adopted a shareholder rights plan designed to preserve the value of our significant United States federal and state NOL carryforwards and other related tax assets under Section 382 of the Internal Revenue Code (“Code”). Section 382 of the Code would limit the value of those tax assets upon an “ownership change.” An “ownership change” is generally defined as a more than 50 percentage point increase in stock ownership, during a rolling three-year testing period, by “5% shareholders” as defined in Section 382 of the Code. The shareholder rights plan was adopted to reduce the likelihood of this occurring by deterring the acquisition of stock by persons or groups that would create such “5% shareholders.”
Throughout the course of 2009, Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (collectively, the “Harbinger Funds”) have steadily decreased their ownership interest in the Company. At the beginning of 2009, the Harbinger Funds held 32,210,720 shares of our stock or approximately 34.1 percent of the Company. Based on the Harbinger Funds’ amended Schedule 13D dated December 3, 2009, as of December 1, 2009 the Harbinger Funds ceased to be the beneficial owner of more than five percent of our common stock.

 

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Summary Results of Operations: For the full year 2009, we reported $1,667 million in net sales, a 21 percent decrease as compared to the same period in 2008. The decrease is due to the sharp decline in demand across the global construction, automotive and industrial markets precipitated by volatility in global capital and credit markets. As the macroeconomic environment improved in 2009, we experienced a steady return of volumes resulting in sequentially increasing net sales in each quarter of 2009. Gross profit for the full year 2009 increased $9 million or 2 percent as compared to the same period in 2008 due to the positive impacts of certain cost reduction programs, lower restructuring charges and the absence of fresh-start accounting expenses caused by our emergence from bankruptcy in February 2008. Furthermore, with the exception of the fourth quarter 2009, which traditionally is our weakest quarter due to seasonal impacts, our gross profit percentage for each of the quarters steadily improved throughout the year and were significantly higher than the gross profit percentages reported in each of the quarters of 2008. Selling, general and administrative expenses decreased $58 million or 20 percent in 2009 as compared to the full year 2008, as we significantly reduced our support organizations in reaction to the challenging economic conditions coupled with a global restructuring program initiated in early 2009 in anticipation of the divestiture of our Integrated Nylon business. In summary, operating income for 2009 was $233 million or 14 percent of net sales as compared to $164 million or 8 percent of net sales for the full year 2008.
Summary of Financial Condition and Liquidity: Preservation and enhancement of our liquidity position, along with optimization of our long-term capital structure, were each a significant focus in 2009. To this end, net proceeds from the issuance of 24.7 million shares of common stock and the 2017 Notes, in conjunction with $230 million in net cash provided after operations and investing activities, which already incorporates a voluntary contribution to our domestic pension plans of $39 million, were predominantly used to reduce our debt by $106 million, increase our cash position by $211 million and extend the maturity of $400 million of long-term debt into 2017. Payment of the above noted voluntary contribution in 2009 will reduce our required contributions in 2010 by approximately the same amount. Furthermore, we amended our Revolver and Term Loan credit agreements in the fourth quarter 2009 in order to provide us with greater operational and strategic flexibility. Among other things, the amendment holds our Leverage Ratio constant at 4.50 from September 30, 2009 through December 31, 2010. In summary, cash flow provided by operations of $251 million, along with the impacts from the changes in our long-term capital structure noted above, as partially offset by certain investments in capital infrastructure, resulted in liquidity of $363 million as of December 31, 2009 or $138 million higher than December 31, 2008.
Outlook
As noted previously, throughout 2009, we experienced a modest but steady improvement in sales volumes as demand for our products increased as global markets, particularly markets in Asia Pacific, experienced growth in comparison to late 2008. Our current operating premise is that automotive markets will grow globally in 2010, with the most significant growth in China and other emerging markets. Growth in the U.S. and Western Europe will be modest. We are not premising growth in the global architectural market, except for the Chinese market, in which we have a lower share in comparison with our architectural market position in other major world areas. Coupled with this volume assumption, we are premising modest price reduction in certain product lines, due to the overall low utilization rates currently being experienced in many of our industries.
In addition, as a result of the completion of the Integrated Nylon divestiture and the continued global investment and focus on alternative energy and energy efficiency initiatives and activities, approximately 5 percent of our 2009 revenue was generated from this market. Management believes that global investment by governments and private industry into these initiatives and activities will continue, and potentially increase, in future years for many reasons, including the continued escalation in the price of oil and energy, a trend we believe will likely continue. We believe that our products and services will benefit significantly from this trend. We, therefore, expect our revenues into this market to grow in future years at rates significantly higher than our other products and services.
In aggregating these premises, our expectation for 2010 is an increase in net sales in the range of 5 percent — 10 percent.
With respect to profitability, the actions we have taken in 2009, including the divestiture of our Integrated Nylon business and the implementation of significant restructuring actions, position us well to benefit from a continued recovery. Generally, our manufacturing facilities are operating at low utilization rates, and the incremental volume premised in 2010 will carry very high incremental profitability. Offsetting these benefits will be the costs associated with the return of certain employee incentive plans, which were suspended in 2009, along with higher raw material costs for certain of our product lines. Overall, therefore, we expect operating margins from continuing operations to remain consistent or modestly higher as compared to the results delivered in 2009.
Our incremental earnings premised in 2010 versus 2009 will generate additional operating cash, which will be offset by higher tax payments, higher environmental remediation payments due to the exhaustion of a restricted fund dedicated for this purpose, new product and growth related capital spending, as well as modest investments into inventory related to the revenue growth. In 2010, we are currently anticipating generating cash from operations less capital spending in the range of $100 million — $150 million from continuing operations.

 

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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these consolidated financial statements, we have made our best estimate of certain amounts included in these consolidated financial statements. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. Management has discussed the development, selection and disclosure of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on the consolidated financial statements and require assumptions that can be highly uncertain at the time the estimate is made. We consider the following items to be our critical accounting policies:
   
Environmental Remediation
   
Litigation and Other Contingencies
   
Income Taxes
   
Impairment of Long-Lived Assets
   
Impairment of Goodwill and Indefinite-Lived Intangible Assets
   
Pension and Other Postretirement Benefits
We have other significant accounting policies but we believe that, compared to the critical accounting policies listed above, the other policies either do not generally require estimates and judgments that are as difficult or as subjective, or are less likely to have a material impact on the reported results of operations for a given period.
Environmental Remediation
With respect to environmental remediation obligations, our policy is to accrue costs for remediation of contaminated sites in the accounting period in which the obligation becomes probable and the cost is reasonably estimable. Cost estimates for remediation are developed by assessing, among other items, (i) the extent of our contribution to the environmental matter; (ii) the number and financial viability of other potentially responsible parties; (iii) the scope of the anticipated remediation and monitoring plan; (iv) settlements reached with governmental or private parties; and (v) our past experience with similar matters. Our estimate of the environmental remediation reserve requirements typically fall within a range. If we believe no better estimate exists within a range of possible outcomes, the minimum loss is accrued. Environmental liabilities are not discounted, and they have not been reduced for any claims for recoveries from third parties.
These estimates are critical because we must forecast environmental remediation activity into the future, which is highly uncertain and requires a large degree of judgment. These reserves include liabilities expected to be paid out over the next fifteen years. Therefore, the environmental reserves may materially differ from the actual liabilities if our estimates prove to be inaccurate, which could materially affect results of operations in a given period. Uncertainties related to recorded environmental liabilities include changing governmental policy and regulations, judicial proceedings, the number and financial viability of other potentially responsible parties, the method and extent of remediation and future changes in technology. Because of these uncertainties, the potential liability for existing environmental remediation reserves may range up to two times the amounts recorded.
Litigation and Other Contingencies
We are a party to legal proceedings involving intellectual property, tort, contract, antitrust, employee benefit, environmental, government investigations and other litigation, claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. To the extent that we conclude their occurrence is probable and the financial impact, should an adverse outcome occur, is reasonably estimable, an accrual for such a contingency is recorded. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, we accrue the low end of the range. In addition, we accrue for legal costs expected to be incurred with a loss contingency.

 

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Pursuant to the Monsanto Settlement Agreement, Monsanto is responsible to defend and indemnify Solutia for any Legacy Tort Claims as that term is defined in the agreement, while Solutia retains responsibility for tort claims arising out of exposure occurring after the Solutia Spinoff. To the extent Solutia has been named as defendants in certain actions and have submitted the matters to Monsanto as Legacy Tort Claims and such matters are not within the meaning of “Legacy Tort Claims” within the Monsanto Settlement Agreement, we would potentially be liable.
Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, we consider many factors. These factors include, but are not limited to, past experience, scientific and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. If the assessment of the various factors changes, the estimates may change and could result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
Income Taxes
As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities at enacted rates. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. The consolidated financial statements include increases in valuation allowances as a result of uncertainty regarding our ability to realize deferred tax assets in the future.
Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. Changes in existing tax laws, regulations, rates and future operating results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are also subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Although we believe the measurement of liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability is reversed and a tax benefit is recognized during the period in which it is determined the liability no longer applies. Conversely, additional tax charges are recorded in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets, including finite-lived intangible assets, are made when conditions indicate the carrying value may not be recoverable under the provisions of U.S. GAAP. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than its carrying value. Our estimate of the cash flows is based on information available at that time including these and other factors: sales forecasts, customer trends, operating rates, raw material and energy prices and other global economic indicators and factors. If an impairment is indicated, the asset value is written down to its fair value based upon market prices or, if not available, upon discounted cash value, at an appropriate discount rate determined by us to be commensurate with the risk inherent in the business model. These estimates are critical because changes to our assumptions used in the development of the impairment analyses can materially affect earnings in a given period and we must forecast cash flows into the future which is highly uncertain and requires a significant degree of judgment.

 

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Impairment of Goodwill and Indefinite-Lived Intangible Assets
As of December 31, 2009 and 2008, we had goodwill and indefinite-lived intangible asset balances of $658 million and $656 million, respectively, which relate to our emergence from bankruptcy and adoption of fresh-start accounting. We perform goodwill and indefinite-lived intangible asset impairment tests during the fourth quarter of each year but on a more frequent basis if changes in circumstances indicate the carrying value may not be recoverable during the intervening period. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a significant asset group within a reporting unit. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.
We perform the review for goodwill impairment at the reporting unit level and the test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available using both a market approach and an income approach. The market approach estimates fair value by applying multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.
If the fair value of a reporting unit is less than its carrying value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.
Other indefinite-lived intangible assets are the Company’s trademarks. Fair values used in testing for potential impairment of our trademarks are calculated by applying an estimated market value royalty rate to the forecasted revenues of the reporting unit that utilize those assets. The assumed cash flows from this calculation are discounted using a weighted-average cost of capital that reflects current market conditions. The shortfall of the fair value below carrying value represents the amount of impairment.
Our fourth quarter reviews concluded that there was no goodwill or indefinite-lived intangible asset impairment in 2009 due to the substantial excess of fair value over the respective carrying value.
Pension and Other Postretirement Benefits
Measurement of the obligations under our defined benefit pension plans and our other postretirement benefit (“OPEB”) plans are subject to several significant estimates. These estimates include the rate of return on plan assets, the rate at which the future obligations are discounted to value the liability and health care cost trend rates. Additionally, the cost of providing benefits depends on demographic assumptions including retirements, mortality, turnover and plan participation. We typically use actuaries to assist us in preparing these calculations and determining these assumptions. Our annual measurement date is December 31 for our defined benefit pension plans and our OPEB plans. The below sensitivity analysis solely relates to our U.S. defined benefit pension and OPEB plans since they both comprise approximately 75 percent of our consolidated funded status on our defined benefit pension plans and OPEB plans.
The expected long-term rate of return on pension plan assets assumption was 8.50 percent in both 2009 and 2008. The expected long-term rate of return on pension plan assets assumption is based on the target asset allocation policy and the expected future rates of return on these assets. A hypothetical 25 basis point change in the assumed long-term rate of return would result in a change of approximately $1 million to pension expense.

 

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The discount rates used to re-measure the pension plans were 5.25 percent and 6.25 percent at December 31, 2009 and 2008, respectively. The discount rates to re-measure the OPEB plans were 4.75 percent and 6.25 percent at December 31, 2009 and 2008. We establish our discount rate based upon the internal rate of return for a portfolio of high quality bonds with maturities consistent with the nature and timing of future cash flows for each specific plan. A hypothetical 25 basis point change in the discount rate for our pension plans results in a change of approximately $11 million in the projected benefit obligation and no change in pension expense. A hypothetical 25 basis point change in the discount rate for our OPEB plans results in a change of approximately $3 million in the accumulated benefit obligation and no impact to OPEB expense.
We estimated the five-year assumed trend rate for healthcare costs in 2009 to be 8.5 percent with the ultimate trend rate for healthcare costs grading by 0.5 percent each year to 5 percent by 2016 and remaining at that level thereafter. A 1 percent change in the assumed health care cost trend rate would have changed the postretirement benefit obligation by $1 million as of December 31, 2009 and would have no impact to OPEB expense in 2009. Our costs for postretirement medical benefits are capped for many current retirees and active employees; therefore, the impact of this hypothetical change in the assumed health care cost trend rate is limited.
Results of Operations
Consolidated Solutia
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Net Sales
  $ 1,667     $ 2,110     $ 1,643     $ (443 )   $ 467       (21 )%     28 %
 
                                         
 
                                                       
Operating Income:
                                                       
Reportable Segment Profit (a)
  $ 432     $ 328     $ 263     $ 104     $ 65       32 %     25 %
Unallocated and Other
    (96 )     (42 )     (27 )   $ (54 )   $ (15 )     (129 )%     (56 )%
Less: Depreciation and Amortization
    (107 )     (100 )     (59 )                                
Less: Equity Earnings from Affiliates, Other Income, Loss on Debt Modification and Net Income Attributable to Noncontrolling Interest included in Segment Profit and Unallocated and Other
    4       (22 )     (36 )                                
 
                                                 
Operating Income
  $ 233     $ 164     $ 141     $ 69     $ 23       42 %     16 %
 
                                         
Net Charges included in Operating Income
  $ (32 )   $ (100 )   $ (41 )                                
 
                                                 
     
(a)  
See Note 19 — Segment and Geographic Data — to the accompanying consolidated financial statements for description of the computation of reportable segment profit.
The decrease in 2009 net sales as compared to 2008 resulted from decreased sales volumes of $412 million or 20 percent and the effect of unfavorable exchange rate fluctuations of $31 million or 1 percent, while overall selling prices were flat year over year. Lower sales volumes were realized by all of our reporting segments due to continued weakness in demand across the global construction, automotive and industrial markets related to the deterioration in the macroeconomic environment which began in the fourth quarter of 2008. The unfavorable currency impact was driven most notably by the increased strength of the U.S. dollar versus the Euro, in comparison to the prior year, due to our strong market positions in Europe by the Saflex and Technical Specialties reporting segments. Higher selling prices experienced in our Technical Specialties and CPFilms reporting segments were offset by price decreases in our Saflex reporting segment.

 

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The increase in 2008 net sales as compared to 2007 resulted from our acquisition of Akzo Nobel’s 50 percent interest in the Flexsys joint venture, which was completed on May 1, 2007 (the “Flexsys Acquisition”), increased selling prices and the effect of favorable currency exchange rate fluctuations, partially offset by lower sales volumes. Prior to our acquisition on May 1, 2007, the results of Flexsys were accounted for using the equity method and recorded as equity earnings from affiliates on the Consolidated Statement of Operations. Net sales increased $281 million or 17 percent in 2008 as a result of the Flexsys Acquisition. The remaining $186 million or 11 percent increase in net sales was a result of higher average selling prices of $164 million or 10 percent and favorable currency exchange rate fluctuations of $53 million or 3 percent, partially offset by lower sales volumes of $31 million or 2 percent. Higher average selling prices were experienced across all reporting segments in response to an escalating raw material profile and, with respect to Technical Specialties and Saflex, in conjunction with generally favorable supply/demand profile in these markets. The favorable currency benefit was driven most notably by the continued weakening of the U.S. dollar versus the Euro, in comparison to the prior year. Other currency movements against the U.S. dollar also benefited our net sales, however, given the strong market positions in Europe within Saflex and Technical Specialties, movements in the Euro versus the U.S. dollar had the most significant impact on our revenues. The lower sales volumes were experienced most notably in our Technical Specialties reporting segment, partially offset by increased volumes in Saflex. The decline in Technical Specialties is due to the shutdown of our product lines at our manufacturing facility in Ruabon, United Kingdom (“Ruabon Facility”) and significant demand decline within the tire industry during the fourth quarter 2008. The volumes in Saflex increased due to growth in international demand.
The increase in 2009 operating income as compared to 2008 resulted primarily from lower net charges as further described below in the Summary of Events Affecting Comparability section, lower raw material and energy costs of approximately $84 million, favorable exchange rate fluctuations, effective implementation of cost containment initiatives which resulted in better plant cost performance and lower selling, general and administrative expenses, significantly offset by lower net sales, lower fixed cost absorption, higher depreciation and amortization due to fresh-start accounting of $7 million and higher share-based compensation expense of $6 million.
The increase in 2008 operating income as compared to 2007 resulted primarily from the Flexsys Acquisition, increased net sales and higher asset utilization and lower manufacturing costs in our Saflex and Technical Specialties reporting segments, partially offset by higher raw material and energy costs of approximately $105 million, higher net charges, increased amortization related to intangible assets as a result of fresh-start accounting of $23 million and increased share-based compensation expense of $11 million. As indicated in the preceding table, operating results were affected by various charges which are described in detail in the Summary of Events Affecting Comparability section. The raw material increases were most impactful within the Technical Specialties and Saflex reporting segments, with the most significant increase experienced in sulfur cost. The increases in raw materials are primarily driven by continued tight supply of these materials, as well as the substantial increases in average oil prices during the year when compared with the prior year.
Saflex
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Net Sales
  $ 690     $ 822     $ 727     $ (132 )   $ 95       (16 )%     13 %
 
                                         
 
                                                       
Segment Profit
  $ 145     $ 94     $ 111     $ 51     $ (17 )     54 %     (15 )%
 
                                         
Net Charges included in Segment Profit
  $ (14 )   $ (47 )   $ (2 )                                
 
                                                 
The decrease in 2009 net sales as compared to 2008 was a result of lower sales volumes of $97 million or 12 percent, lower average selling prices of $18 million or 2 percent, and unfavorable currency exchange rate fluctuations of $17 million or 2 percent. Lower sales volumes were due to weakness in demand across the global automotive and, to a lesser extent, construction markets, which negatively impacted sales volumes of SAFLEX® plastic interlayer and Polyvinyl Butyral resin, partially offset by higher volumes experienced in the solar energy market. The lower average selling prices are predominantly due to the weaker demand environment in 2009. The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening of the U.S. dollar in relation to the Euro in comparison to the comparable period in 2008.

 

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The increase in 2008 net sales as compared to 2007 was a result of higher average selling prices of $38 million or 5 percent, higher sales volumes of $25 million or 4 percent, and favorable currency exchange rate fluctuations of $32 million or 4 percent. The increase in selling prices is related to our global price increase on SAFLEX® plastic interlayer, Polyvinyl Butyral resin and plasticizer in response to higher raw material costs and favorable supply/demand profile. Higher sales volumes were experienced in targeted growth markets of Europe and Asia Pacific, as sales volumes into the domestic market were lower than the prior year. The increased sales in Asia Pacific were a result of the continued expanding demand for laminated glass in that market, which was partially supported by our plant in Suzhou, China which opened in the third quarter 2007. The favorable currency exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to 2007.
The increase in 2009 segment profit in comparison to 2008 resulted primarily from lower net charges, which are described in detail in the Summary of Events Affecting Comparability section, lower raw material costs of $30 million, and effective implementation of cost containment initiatives and plant shutdown activities, which resulted in improved plant cost performance and lower selling, general and administrative expenses, partially offset by lower net sales as described above and lower fixed cost absorption.
The decrease in 2008 segment profit in comparison to 2007 resulted primarily from higher net charges as described in detail in the Summary of Events Affecting Comparability section, partially offset by increased net sales as described above, improved asset utilization, lower manufacturing costs and a flat cost profile for selling, general and administrative expenses. The segment experienced approximately $31 million of higher raw material costs in comparison to the prior year, which was recovered through increased selling prices.
CPFilms
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Net Sales
  $ 185     $ 236     $ 234     $ (51 )   $ 2       (22 )%     1 %
 
                                         
 
                                                       
Segment Profit
  $ 26     $ 42     $ 58     $ (16 )   $ (16 )     (38 )%     (28 )%
 
                                         
Net Charges included in Segment Profit
  $ (7 )   $ (13 )   $                                  
 
                                                 
The decrease in 2009 net sales as compared to 2008 resulted primarily from lower sales volumes of $53 million or 22 percent, and, to a lesser extent, unfavorable currency exchange rate fluctuations of $3 million or 1 percent, partially offset by higher average selling prices of $5 million or 1 percent. With the exception of Asia Pacific, where sales volumes increased modestly in 2009, sales volumes decreased in all major geographic markets due to the severe global economic downturn and its effect on the automotive, residential housing, and commercial construction markets, but the decrease was more pronounced in Russia due to credit issues in the region.
The increase in 2008 net sales compared to 2007 resulted from higher selling prices of $7 million or 3 percent, partially offset by decreased sales volumes of $5 million or 2 percent. Higher average selling prices and lower volumes were experienced in LLUMARâ and VISTAâ professional film products. The lower volumes were primarily experienced in the domestic market throughout 2008 and in the fourth quarter 2008 across all major geographic markets in conjunction with the severe global economic downturn.
The decrease in 2009 segment profit in comparison to 2008 resulted primarily from decreased net sales as described above and lower fixed cost absorption, partially offset by effective implementation of cost containment initiatives, which resulted in lower selling, general and administrative expenses, lower raw material costs of $5 million and lower net charges, which are described in detail in the Summary of Events Affecting Comparability section.
The decrease in 2008 segment profit in comparison to 2007 resulted primarily from higher charges in 2008, as described in detail in the Summary of Events Affecting Comparability section, higher manufacturing, raw material and energy costs, increased investment in sales and marketing infrastructure and in market development programs globally.

 

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Technical Specialties
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Net Sales
  $ 774     $ 1,015     $ 646     $ (241 )   $ 369       (24 )%     57 %
 
                                         
 
                                                       
Segment Profit
  $ 261     $ 192     $ 94     $ 69     $ 98       36 %     104 %
 
                                         
Net Gains (Charges) included in Segment Profit
  $ 14     $ (43 )   $ (30 )                                
 
                                                 
The decrease in 2009 net sales as compared to 2008 resulted from lower sales volumes of $246 million or 24 percent and unfavorable currency exchange rate fluctuations of $9 million or 1 percent, partially offset by higher average selling prices of $14 million or 1 percent. Sales volumes decreased in all products within Technical Specialties due to the global economic downturn but this decrease, on a rate of decline basis, was more pronounced within SANTOFLEX® antidegradants, SANTOCURE® and PERKACIT® primary and ultra accelerators and other rubber chemicals products. The decline in sales volumes for SANTOFLEX® antidegradants and SANTOCURE® primary accelerators were significantly affected by increasing pressure from Far Eastern producers. The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening U.S. dollar in relation to the Euro in comparison to the comparable period in 2008. Higher average selling prices were experienced primarily within CRYSTEX® insoluble sulphur, THERMINOL® heat transfer fluids and SKYDROL® aviation hydraulic fluids. The increase in selling prices is related to our global price increases initiated in the third quarter 2008.
The increase in 2008 net sales as compared to 2007 resulted primarily from the Flexsys Acquisition. Prior to our acquisition on May 1, 2007, the results of Flexsys were accounted for using the equity method and were not recorded within the Technical Specialties reportable segment. The Flexsys Acquisition resulted in an increase in net sales of $281 million or 43 percent. The remaining increase in net sales of $88 million or 14 percent was a result of higher average selling prices of $119 million or 19 percent and favorable currency exchange rate fluctuations of $19 million or 3 percent, partially offset by lower sales volumes of $50 million or 8 percent. Higher average selling prices were experienced primarily in CRYSTEX® insoluble sulphur, SANTOFLEX® antidegradants and THERMINOL® heat transfer fluids. The higher average selling prices are in response to higher raw material costs across all products within Technical Specialties in addition to a favorable supply/demand profile in certain specialty chemical markets. The lower sales volumes were primarily experienced in the fourth quarter 2008 in conjunction with the severe global economic downturn and the closure of our product lines at our Ruabon Facility. The economic downturn primarily impacted CRYSTEX® insoluble sulphur, partially offset by increased volumes in THERMINOL® heat transfer fluids. The favorable currency exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to the same period in 2007.
The increase in 2009 segment profit in comparison to 2008 resulted primarily from higher net gains, which are described in detail in the Summary of Events Affecting Comparability section, favorable exchange rate fluctuations, effective implementation of cost containment initiatives, which resulted in improved plant cost performance and lower selling, general and administrative expenses, and lower raw material costs of $48 million, partially offset by lower net sales and lower fixed cost absorption. The favorable exchange rate fluctuation on segment profit is due to a higher percentage of our operating costs transacted in Euros than net sales in the same currency.
The increase in 2008 segment profit in comparison to 2007 resulted primarily from the Flexsys Acquisition, increased net sales as described above and improved manufacturing costs, partially offset by increased raw material costs, higher charges, which are described in detail in the Summary of Events Affecting Comparability section and unfavorable currency exchange rate fluctuations. The increased selling prices more than offset the increase of $48 million in raw material costs primarily related to sulphur. Improved manufacturing cost was a result of controlled spending. The unfavorable currency exchange rate fluctuation is a result of a significant portion of Technical Specialties manufacturing capacity being located in Europe and the weakening of the U.S. Dollar versus the Euro.

 

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Unallocated and Other
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Components of Unallocated and Other
                                                       
Other Operations Segment Profit (Loss)
  $ (12 )   $ (2 )   $ 1                                  
Corporate Expenses
    (46 )     (55 )     (53 )                                
Share-Based Compensation Expense
    (17 )     (11 )                                      
Equity Earnings from Affiliates
                12                                  
Other Unallocated Income (Expense), net
    (21 )     26       13                                  
 
                                                 
Unallocated and Other results
  $ (96 )   $ (42 )   $ (27 )   $ (54 )   $ (15 )     (129 )%     (55 )%
 
                                         
Gains (Charges) included in Unallocated and Other
  $ (25 )   $ 10     $ 5                                  
 
                                                 
Unallocated and Other results in 2009 decreased as compared to 2008 primarily due to higher net charges, losses on foreign currency exposure, higher charges for environmental remediation projects, higher share-based compensation expense, lower interest income and lower segment profit from other operations, partially offset by lower corporate expenses. Included in the results of Unallocated and Other in 2009 is (i) a charge of $12 million related to the general corporate restructuring with $10 million recorded in corporate expenses and $2 million recorded in other operations segment profit (loss); (ii) an $11 million net pension plan settlement charge recorded in other unallocated income (expense), net; (iii) a $6 million loss resulting from the sale of the North America plastic products business (“Plastic Products Sale”) recorded in other operations segment profit (loss); and (iv) a $4 million gain related to the reduction in the 2008 annual incentive plan recorded in corporate expenses. In 2008, we recorded (i) a $7 million gain resulting from the settlement of emergence related incentive accruals recorded in other unallocated income (expense), net; (ii) a $6 million gain resulting from surplus land sales with $3 million recorded in both other unallocated income (expense), net and other operations segment profit (loss); (iii) a $3 million gain related to joint settlements with Monsanto of legacy insurance policies with insolvent insurance carriers recorded in other unallocated income (expense), net; (iv) a $3 million charge resulting from general corporate restructuring involving headcount reductions recorded in corporate expenses; (v) a $2 million charge resulting from the relocation of our plastic products business from our manufacturing facility in Ghent, Belgium to Oradea, Romania recorded in other operations segment profit (loss); and (vi) a $1 million charge resulting from the expensing of the step-up in basis of inventory in accordance with fresh-start accounting recorded in other operations segment profit (loss).
After consideration of the aforementioned items in 2009 and 2008, corporate expenses decreased $12 million primarily due to lower discretionary expenses resulting from the implementation of certain cost reduction programs. Share-based compensation expense increased $6 million due to management incentive and director stock compensation plans adopted upon our emergence from bankruptcy and an additional award granted early in the third quarter of 2009. After consideration of the aforementioned items in 2009 and 2008, other unallocated income (expense), net decreased by $23 million primarily due to losses on foreign currency exposure and higher charges for environmental remediation projects. The higher charges for environmental remediation projects is due to a full year in 2009 of operations and maintenance costs on projects classified as liabilities subject to compromise prior to our emergence from bankruptcy in February 2008 in addition to increased legal spending on remediation projects in Anniston, Alabama as we seek recovery from other parties. After consideration of the aforementioned items recorded in 2009 and 2008, other operations segment loss decreased by $2 million as compared to the comparable period in 2008 due to the global economic downturn.
Unallocated and other results in 2008 decreased in comparison to 2007 primarily due to lower equity earnings from affiliates, higher corporate expenses, lower gains from adjustments to the LIFO reserve, lower interest income and decreased profit from our other operations, partially offset by higher gains on foreign currency and higher net gains. In 2007, we recorded the following net gains in other unallocated income (expense), net: (i) a gain on a litigation matter of $21 million; (ii) a charge of $7 million recorded to write-off debt issuance costs and to record the DIP credit facility as modified at its fair value as of the amendment date; (iii) $5 million of net pension plan settlement charges; and (iv) a $4 million restructuring charge due to the termination of a third-party agreement at one of our facilities.

 

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After consideration of the aforementioned items recorded in 2008, corporate expenses decreased $1 million primarily due to lower functional expense. Share-based compensation increased due to the adoption of management incentive and director stock compensation plans upon our emergence from bankruptcy. The decrease in equity earnings from affiliates of $12 million is a result of the Flexsys Acquisition completed on May 1, 2007. After consideration of the aforementioned items recorded in 2008 and 2007, other unallocated income (expense), net increased by $5 million due to gains on foreign currency, partially offset by lower interest income. After consideration of the aforementioned items recorded in 2008, other operations segment profit (loss) decreased by $3 million due to other costs associated with the relocation of our plastic products business.
Interest Expense
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Interest Expense
  $ 159     $ 162     $ 134     $ (3 )   $ 28       (2 )%     21 %
 
                                         
Charges included in Interest Expense
  $ (38 )   $ (1 )   $ (8 )                                
 
                                                 
Interest expense decreased in 2009 compared to 2008 due to decreased cash interest expense from lower debt outstanding with lower interest rates in 2009 than in 2008, substantially offset by higher charges. Included in our debt to fund our emergence from Chapter 11 was a $400 million senior unsecured bridge facility (“Bridge”), which was subsequently repaid in August 2008. In October 2009, we issued the 2017 Notes and a portion of the net proceeds were used to pay down $300 million of principal on our Term Loan. The repayment of the Bridge and significantly lower borrowings outstanding on our Revolver during 2009, partially offset by the net increase in debt related to the issuance of the 2017 Notes resulted in overall lower average debt outstanding in 2009 of approximately $350 million. In addition, the interest rate on the Bridge was 15.5 percent and the repayment allowed our weighted average interest rate during 2009 to be approximately 100 basis points lower than in 2008. In February 2009, we discontinued hedge accounting on our interest rate swap agreements related to our Term Loan. As interest rates fluctuate, mark-to-market gains or losses on our interest rate swap agreements, which do not affect cash flow, are recognized in interest expense. These gains or losses may create volatility in our Consolidated Statement of Operations.
Interest expense in 2009 includes (i) a charge of $30 million related to the $300 million pay down on the Term Loan to write-off unamortized debt issuance costs and (ii) a charge of $8 million to write-off unamortized debt issuance costs and debt discount related to the repayment of the German term loan. Interest expense in 2008 included a charge of $1 million to write-off unamortized debt issuance costs related to the repayment of the Bridge.
The increase in interest expense in 2008 in comparison to 2007 resulted principally from higher debt outstanding with higher interest rates in 2008 than in 2007. Average debt outstanding increased $513 million or 47 percent to fund the Flexsys Acquisition, as only a portion of debt utilized to acquire Flexsys was incurred prior to the end of the first quarter of 2007, and our emergence from Chapter 11 on the Effective Date. Included in our debt to fund our emergence from Chapter 11 is the Bridge, which was subsequently repaid in August 2008. The higher interest rates are a result of a changed interest rate profile of our debt structure due to the replacement of the DIP credit facility with the Term Loan and Revolver (“Financing Agreements”). The 2008 results include a $1 million charge related to the repayment of the Bridge compared to an $8 million interest expense charge related to claims recognized as allowed secured claims through settlements approved by the Bankruptcy Court
Reorganization Items, net
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Reorganization Items, net
  $     $ 1,433     $ (298 )   $ (1,433 )     1,731       N.M.       N.M.  
 
                                         

 

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Reorganization items, net are presented separately in the Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by us because we were in reorganization under Chapter 11 of the U.S. Bankruptcy Code. We did not record any charges in reorganization items in 2009 due to our emergence from Chapter 11 on February 28, 2008.
Reorganization items incurred in 2008 included a $104 million charge on the settlement of liabilities subject to compromise, $1,589 million gain from fresh-start accounting adjustments, which excludes the gain allocated to discontinued operations of $212 million, and $52 million of professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings. The increase in reorganization items, net as compared to 2007 is due to the aforementioned effects of settling the liabilities subject to compromise and adopting fresh-start accounting.
Income Tax Expense
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Income Tax Expense
  $ 14     $ 227     $ 17     $ (213 )   $ 210       N.M.       N.M.  
 
                                         
Increase (Decrease) in Valuation Allowance included in Income Tax Expense
  $ 23     $ (251 )   $ 82                                  
 
                                                 
Our income tax expense is affected by the mix of income and losses in the tax jurisdictions in which we operate. The decrease in income tax expense in 2009 as compared to 2008 is primarily due to $202 million of income tax expense recognized in 2008 resulting from our emergence from bankruptcy and the effect of our adoption of fresh-start accounting. After consideration of these items, the remaining income tax expense recognized is almost entirely attributable to operations outside the U.S. resulting in an effective tax rate on operations outside the U.S. in 2009 and 2008 of 11 percent and 38 percent, respectively. The decrease in the ex-U.S. effective rate in 2009 compared to 2008 is due to an improved mix of earnings and implementation of tax strategies as well as a decrease in contingency reserves of $8 million in 2009 related to uncertain tax positions, as compared to an increase in contingency reserves of $4 million in 2008.
The increase in income tax expense in 2008 as compared to 2007 is primarily attributable to the income tax expense related to our emergence from bankruptcy and the effect of our adoption of fresh-start accounting, as discussed above. After consideration of these items, the remaining income tax expense recognized is almost entirely attributable to operations outside the U.S resulting in an effective tax rate on operations outside the U.S. in 2008 and 2007 of 38 percent and 49 percent, respectively. The decrease in the ex-U.S. effective rate in 2008 compared to 2007 is due to an increase in contingency reserves of $4 million in 2008 compared to an increase of $10 million in 2007.
As a result of the issuance of new common stock upon emergence from bankruptcy, we realized a change of ownership for purposes of Section 382 of the Code. We do not currently expect this change to significantly limit our ability to utilize our NOL in the carryforward period, which we estimate to be approximately $1.6 billion at December 31, 2009, of which approximately $600 million was available without limitation.
Discontinued Operations
                                                         
                            $     %  
                            Increase     Increase  
    Successor     Combined     Predecessor     (Decrease)     (Decrease)  
                            2009 vs.     2008 vs.     2009 vs.     2008 vs.  
(dollars in millions)   2009     2008     2007     2008     2007     2008     2007  
Integrated Nylon business
  $ (170 )   $ (445 )   $ 50                                  
Dequest business
                19                                  
Other
    1       1       (5 )                                
 
                                                 
Income (Loss) from Discontinued Operations, net of tax
  $ (169 )   $ (444 )   $ 64     $ 275     $ (508 )     62 %     N.M.  
 
                                         
Reorganization items included in income (loss) from discontinued operations
  $     $ 212     $                                  
 
                                                 

 

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Income (loss) from discontinued operations consists of the results of our Integrated Nylon business, our water treatment phosphonates business (“DEQUEST®”) and other previously divested businesses.
As described in Note 4 — Acquisitions and Divestitures — to the accompanying consolidated financial statements, we sold our Integrated Nylon business on June 1, 2009 and recorded a loss on the sale in 2009 of $76 million. After consideration of this loss, the operating results of the Integrated Nylon business for the 2009 period through the date of sale resulted in losses of $94 million, net of tax, including a $31 million charge, net of tax, to write down the carrying value of long-lived assets to zero. For 2008, losses of $445 million related to Integrated Nylon include an impairment charge of long-lived assets of $461 million as partially offset by reorganization items primarily related to the elimination of the LIFO reserve of $204 million and the expensing of the step-up in basis of the inventory of $7 million.
Included in the results of discontinued operations in 2007 is a gain on the sale of the DEQUEST® business of $34 million, partially offset by income taxes of $15 million.

 

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Summary of Events Affecting Comparability
Charges and gains recorded in 2009, 2008 and 2007 and other events affecting comparability have been summarized and described in the table and accompanying footnotes below (dollars in millions):
2009 Events
                                           
                    Technical              
Increase/(Decrease)   Saflex     CPFilms     Specialties     Unallocated/Other     Consolidated  
 
Impact on:
                                       
Cost of goods sold
  $ (2 )   $     $ (3 )   $ (1 )   $ (6 ) (a)
 
    3       1       1       1       6 (b)
 
    5                         5   (c)
 
                (2 )           (2 ) (d)
 
                      7       7   (e)
 
          4                   4   (f)
 
                      1       1   (g)
Selling, general and administrative expenses
    (4 )           (9 )     (3 )     (16 ) (a)
 
    12       3       2       11       28   (b)
 
                      4       4   (e)
 
                1             1   (h)
Research, development and other operating expenses
    (1 )                       (1 ) (a)
 
    1                         1 (b)
 
                (4 )           (4 ) (i)
 
                      5       5 (j)
 
          (1 )                 (1 ) (f)
 
                             
Operating Income Impact
    (14 )     (7 )     14       (25 )     (32 )
 
Interest expense
                      (30 )     (30 ) (k)
 
                      (8 )     (8 ) (l)
 
                             
Pre-tax Income Statement Impact
  $ (14 )   $ (7 )   $ 14     $ (63 )     (70 )
 
                             
Income tax impact
                                    (3 ) (m)
 
                                     
After-tax Income Statement Impact
                                  $ (67 )
 
                                     
     
(a)  
Gain related to the reduction in the 2008 annual incentive plan ($23 million pre-tax and $20 million after-tax).
 
(b)  
Severance and retraining costs related to the general corporate restructuring ($35 million pre-tax and $29 million after-tax).
 
(c)  
Charges related to the closure of the SAFLEX® plastic interlayer production line at the Trenton Facility ($5 million pre-tax and after-tax).
 
(d)  
Net gains related to the closure of the Ruabon Facility ($2 million pre-tax and after-tax).
 
(e)  
Net pension plan settlements, as more fully described in Note 13 to the accompanying consolidated financial statements ($11 million pre-tax and after-tax).
 
(f)  
Net charges of $3 million related to consolidation of certain European manufacturing and distribution sites ($3 million pre-tax and after-tax).
 
(g)  
Impairment of intangible assets related to the Plastic Products Sale ($1 million pre-tax and after-tax).
 
(h)  
Impairment of intangible assets related to the sale of our Thiurams business (“Thiurams Sale”) ($1 million pre-tax and after-tax).
 
(i)  
Gain on the Thiurams Sale ($4 million pre-tax and $3 million after-tax).
 
(j)  
Loss on the Plastic Products Sale ($5 million pre-tax and after-tax).
 
(k)  
Charges related to the $300 million pay down on the Term Loan to write-off unamortized debt issuance costs ($30 million pre-tax and after-tax).
 
(l)  
Charges related to the repayment of the German term loan to write-off unamortized debt issuance costs and debt discount ($8 million pre-tax and after-tax).
 
(m)  
Income tax expense has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

 

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2008 Events
                                         
                    Technical              
Increase/(Decrease)   Saflex     CPFilms     Specialties     Unallocated/Other     Consolidated  
 
Impact on:
                                       
Cost of goods sold
  $ 36     $ 10     $ 20     $ 1     $ 67 (a)
 
                25             25 (b)
 
    10                         10 (c)
 
                (5 )           (5 ) (d)
 
                      (3 )     (3 ) (e)
 
                3             3 (f)
 
    1                   2       3 (g)
Selling, general and administrative expenses
                      3       3 (g)
 
          3                   3 (h)
Research, development and other operating expenses
                      (6 )     (6 ) (i)
 
                             
 
 
Operating Income Impact
    (47 )     (13 )     (43 )     3       (100 )
 
 
Interest expense
                      (1 )     (1 ) (j)
Other income, net
                      7       7 (k)
Reorganization Items, net
                      1,433       1,433 (l)
 
                             
 
Pre-tax Income Statement Impact
  $ (47 )   $ (13 )   $ (43 )   $ 1,442       1,339  
 
                             
Income tax impact
                                    185 (m)
 
                                     
After-tax Income Statement Impact
                                  $ 1,154  
 
                                     
     
(a)  
Charges resulting from the step-up in basis of our inventory in accordance with fresh-start accounting ($67 million pre-tax and $52 million after-tax).
 
(b)  
Charges related to the announced closure of the Ruabon Facility ($25 million pre-tax and after-tax).
 
(c)  
Impairment and charges related to the announced closure of the SAFLEX® plastic interlayer production line at the Trenton Facility ($10 million pre-tax and after-tax).
 
(d)  
Gain related to the termination of a natural gas purchase contract related to the announced closure of the Ruabon Facility ($5 million pre-tax and after-tax).
 
(e)  
Gain resulting from settlements of legacy insurance policies with insolvent insurance carriers ($3 million pre-tax and after-tax).
 
(f)  
Impairment of fixed assets in the Rubber Chemicals business ($3 million pre-tax and $2 million after-tax).
 
(g)  
Restructuring costs related principally to severance and retraining costs ($6 million pre-tax and after-tax).
 
(h)  
Write-down of indefinite-lived intangible assets ($3 million pre-tax and $2 million after-tax).
 
(i)  
Gain resulting from surplus land sales ($6 million pre-tax and after-tax).
 
(j)  
Unamortized debt issuance costs associated with the repayment of the Bridge ($1 million pre-tax and after-tax).
 
(k)  
Gain resulting from the settlement of emergence related incentive and professional fees accruals ($7 million pre-tax and after-tax).
 
(l)  
Reorganization items, net consist of the following: $104 million charge on the settlement of liabilities subject to compromise, $1,589 million gain from fresh-start accounting adjustments, and $52 million of professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings ($1,433 million pre-tax and $1,231 million after-tax).
 
(m)  
Income tax expense has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

 

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2007 Events
                                           
                    Technical              
Increase/(Decrease)   Saflex     CPFilms     Specialties     Unallocated/Other     Consolidated  
 
Impact on:
                                       
Cost of goods sold
  $     $     $ 25     $     $ 25 (a)
 
                      4       4 (b)
 
                3             3 (c)
 
                      3       3 (d)
 
    1             1             2 (e)
Selling, general and administrative expenses
                      2       2 (d)
 
    1             1             2 (e)
 
                             
 
 
Operating Income Impact
    (2 )           (30 )     (9 )     (41 )  
 
Interest expense
          (2 )           (6 )     (8 ) (f)
Other income, net
                      21       21 (g)
Loss on debt modification
                      (7 )     (7 ) (h)
Reorganization items, net
                      (298 )     (298 ) (i)
 
                             
 
 
Pre-tax Income Statement Impact
  $ (2 )   $ (2 )   $ (30 )   $ (299 )     (333 )  
 
                               
Income tax impact
                                    (7 ) (j)
 
                                     
After-tax Income Statement Impact
                                  $ (326 )  
 
                                     
     
(a)  
Impairment of fixed assets in the Rubber Chemicals business ($25 million pre-tax and $20 million after-tax).
 
(b)  
Restructuring charge resulting from the termination of a third-party agreement at one of our facilities ($4 million pre-tax and $3 million after-tax).
 
(c)  
Charge resulting from the step-up in basis of Rubber Chemicals’ inventory in accordance with purchase accounting ($3 million pre-tax and after-tax).
 
(d)  
Net pension plan settlements, as more fully described in Note 13 to the accompanying consolidated financial statements ($5 million pre-tax and after-tax — see note (j) below).
 
(e)  
Restructuring costs related principally to severance and retraining costs ($4 million pre-tax and $3 million after-tax).
 
(f)  
Charge resulting from recognition of interest expense on claims recognized as allowed secured claims through settlements approved by the Bankruptcy Court ($8 million pre-tax and after-tax — see note (j) below).
 
(g)  
Settlement gain, net of legal expenses ($21 million pre-tax and after-tax — see note (j) below).
 
(h)  
We recorded a charge of approximately $7 million (pre-tax and after-tax — see note (j) below) to record the write-off of debt issuance costs and to record the DIP facility as modified at its fair value as of the amendment date.
 
(i)  
Reorganization items, net consist of the following: a $224 million net charge from adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; $67 million of professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings; $9 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain of our employees approved by the Bankruptcy Court; and a $2 million net gain realized from claim settlements ($298 million pre-tax and after-tax — see note (j) below).
 
(j)  
With the exception of items (a), (b), (c) and (e) above, which relate to operations not in reorganization, the above items are considered to have like pre-tax and after-tax impact as the tax benefit or expense realized from these events is offset by the change in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to their recovery due to our Chapter 11 bankruptcy filing.
Environmental Matters
We operate global manufacturing facilities that are subject to numerous laws and government regulations concerning environmental, safety and health matters. U.S. environmental legislation that has a particular impact on us includes the Hazardous Materials Transportation Act; the Emergency Planning and Community Right to Know Act; Toxic Substances Control Act; the Resource Conservation and Recovery Act; the Clean Air Act; the Clean Water Act; and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as Superfund). We are also subject to the Occupational Safety and Health Act and regulations of the Occupational Safety and Health Administration (“OSHA”) concerning employee safety and health matters. The EPA, OSHA and other federal agencies have the authority to promulgate regulations that have an impact on our operations. In addition to these federal activities, various states have been delegated certain authority under several of these federal statutes and have adopted environmental, safety and health laws and regulations. State or federal agencies having lead enforcement authority may seek fines and penalties for violation of these laws and regulations. Also, private parties have rights to seek recovery, under the above statutes or the common law, for civil damages arising from environmental conditions, including damages for personal injury and property damage. Company policy requires that all operations fully meet or exceed legal and regulatory requirements.

 

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Emissions of greenhouse gases due to human activities and their potential impact on climate change currently are subjects of global debate. We monitor existing and proposed legislative developments to control greenhouse gas emissions which may affect the cost and supply of energy derived from coal and other fossil fuels for our operations. Concurrently, we voluntarily work to reduce our own greenhouse gas emissions through various energy reduction projects such as the installation in 2009 of wind turbines which supply the electrical needs of our Newport, Wales (U.K.) plant.
Due to the nature of our business, we make substantial expenditures for environmental remediation activities. In almost all cases, our liability arising from historical contamination is a result of operations and other events that occurred at our facilities or as a result of their operation prior to the Solutia Spinoff. For example, we have agreed to share responsibility with Monsanto for the environmental remediation at certain locations outside our plant boundaries in Anniston, Alabama, and Sauget, Illinois, which were incurred prior to the Solutia Spinoff (the “Shared Sites”). Under this cost sharing arrangement, we are responsible for the funding of environmental liabilities at the Shared Sites from the Effective Date up to a total of $325 million after the exhaustion of funds from the special purpose entity dedicated to the Shared Sites. Thereafter, if needed, we and Monsanto will share responsibility equally. From the Effective Date through December 31, 2009, we have made cash payments of $11 million toward remediation of Shared Sites after exhaustion of the of special purpose entity funds and have accrued an additional $173 million to be paid over the life of the Shared Sites remediation activity.
At December 31, 2009, our Consolidated Statement of Financial Position included an accrual of $291 million compared to $309 million at December 31, 2008 for all environmental remediation activities that we believe to be probable and estimable. Total cash expenditures for environmental remediation activities related to recorded environmental liabilities were $29 million, $23 million and $10 million in 2009, 2008 and 2007, respectively. Of these amounts, in 2009 and 2008, $28 million and $18 million, respectively, were reimbursed to us by a special purpose entity established upon our emergence from bankruptcy, which was fully exhausted in the fourth quarter 2009. Charges taken for environmental remediation activities in 2009, 2008 and 2007 were $10 million, $264 million (of which $257 million related to a charge resulting from our emergence from bankruptcy and the adoption of fresh-start accounting), and $8 million, respectively. In 2010, we anticipate our cash expenditures and charges for environmental remediation activities to be similar to the gross cash expenditures and amounts expensed, respective, in 2009.
Derivative Financial Instruments
Our business operations give rise to market risk exposures that result from changes in currency exchange rates, interest rates and certain commodity prices. To manage the volatility relating to these exposures, we enter into various hedging transactions that enable us to alleviate the adverse effects of financial market risk. Our approved policies and procedures do not permit the purchase or holding of any derivative financial instruments for trading purposes. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations. Note 3 — Significant Accounting Policies — and Note 11 — Derivatives and Risk Management — to the accompanying consolidated financial statements include further discussion of our accounting policies for derivative financial instruments.
Foreign Currency Exchange Rate Risk
We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. We use foreign currency hedging instruments to manage the volatility associated with foreign currency purchases of materials and other assets and liabilities created in the normal course of business. We primarily use forward exchange contracts and purchase options with maturities of less than 18 months to hedge these risks. We also enter into certain foreign currency derivative instruments primarily to protect against exposure related to intercompany financing transactions. Our policy prescribes the range of allowable hedging activity and what hedging instruments we are permitted to use. Because the counterparties to these contracts are major international financing institutions, credit risk arising from these contracts is not significant, and we do not anticipate any counterparty losses. Currency restrictions are not expected to have a significant effect on our cash flows, liquidity or capital resources. Major currencies affecting our business are the U.S. dollar, British pound sterling, Euro, Canadian dollar, Swiss franc, Brazilian real, Malaysian ringgit, Singapore dollar, Chinese yuan and the Japanese yen.

 

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At December 31, 2009, we have currency forward contracts to purchase and sell $167 million of currencies, principally the Euro, British pound sterling, U.S. dollar and Malaysian ringgit, with average remaining maturities of five months. Based on our overall currency rate exposure at December 31, 2009, including derivatives and other foreign currency sensitive instruments, a 10 percent adverse change in quoted foreign currency rates of these instruments would result in a change in fair value of these instruments of $3 million.
Interest Rate Risk
Interest rate risk is primarily related to changes in interest expense from floating rate debt. During 2009, our floating rate debt consisted of our Revolver and Term Loan. In order to limit our exposure to changes in interest expense from floating rate debt, we entered into interest rate cap and swap agreements related to the Term Loan during 2008. The interest rate cap agreements have a notional amount of $900 million and a strike rate of 4.25% on 1-month LIBOR that are effective through April 2010. The interest rate swap agreements have declining total notional amounts of $800 million to $150 million and are effective from April 2010 through February 2014. Under the Term Loan, we have the option to choose LIBOR, subject to a 3.50 percent floor, or prime rate plus an applicable margin. After the expiration of a LIBOR contract in the second quarter 2009, we chose the prime rate due to the cash interest savings. During the year, a hypothetical increase of 1 percent in the prime rate would have increased interest expense during the year by $7 million. Due to the historically low LIBOR rates during the year, our LIBOR floor of 3.50 percent was in excess of any 1 percent increase in LIBOR rates. An analysis of the impact of a hypothetical increase in interest rates in relation to our Revolver has not been performed since there were no borrowings outstanding on the Revolver after the sale of our Integrated Nylon business.
Commodity Price Risk
Certain raw materials and energy resources used by us are subject to price volatility caused by weather, crude oil prices, supply conditions, political and economic variables and other unpredictable factors. We use forward and option contracts to manage a portion of the volatility related to anticipated energy purchases, primarily natural gas used as part of domestic operations. Forward and option contracts were used by us during 2009 prior to the sale of our Integrated Nylon business; however, we did not have any commodity forward contracts at December 31, 2009 due to our decreased exposure to natural gas upon the divestiture of our Integrated Nylon business.
Financial Condition and Liquidity
As of December 31, 2009, our total liquidity was $363 million, which was comprised of $243 million in cash and $120 million in availability under our Revolver. Our Revolver is limited to the lesser of the amount of our borrowing base, as defined, but generally calculated as a percentage of allowable inventory and trade receivables or $350 million. As of December 31, 2009, our borrowing base was $164 million with availability reduced by required letters of credit of $44 million and no borrowings outstanding. With the divestiture of our Integrated Nylon business in the second quarter 2009, along with this business’ inventory and trade receivables, the calculated borrowing base under our Revolver was reduced to amounts significantly below our original $450 million maximum. Therefore, we voluntarily reduced the maximum availability under our Revolver by $50 million in both the third and fourth quarters 2009 to a maximum availability of $350 million.
Preservation and enhancement of our liquidity position, along with optimization of our long-term capital structure, were each a significant focus in 2009. To this end, net proceeds from the issuance of 24.7 million shares of common stock and the 2017 Notes, in conjunction with $230 million in net cash provided after operations and investing activities, were predominantly used to reduce our debt by $106 million, increase our cash position by $211 million and extend the maturity of $400 million of long-term debt into 2017. We amended our Financing Agreements in the fourth quarter 2009 in order to provide us with greater operational and strategic flexibility. Among other things, the amendment holds our Leverage Ratio constant at 4.50 from September 30, 2009 through December 31, 2010.
For 2010, our anticipated use of cash includes fulfillment of our interest, pension, environmental, restructuring and tax obligations, in addition to capital expenditures for new products, expansion and productivity projects and for maintenance and safety requirements. To the extent required to fund certain seasonal demands of our operations, an additional use of cash may be to fund working capital although management has instituted significant monitoring procedures and, as a result, expects this use of cash to be closely managed. Other sources of liquidity may include additional lines of credit, financing other assets, customer receivables and/or asset sales, all of which are allowable, with certain limitations, under our existing credit agreements.

 

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In summary, we expect that our cash on hand, coupled with future cash flows from operations and other sources of liquidity, including our Revolver, will provide sufficient liquidity to allow us to meet our projected cash requirements. However, common with other companies with similar exposure to global economic and financial events, one or more financial institutions may cease to be able to fulfill their funding obligations and we may not be able to access substitute capital. Also, we may experience a decline in the demand for our products, which could impact our ability to generate cash from operations.
Cash Flows — Continuing Operations
Our cash flows from continuing operations attributable to operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the following table:
                                         
    Successor     Combined     Predecessor        
    Twelve Months     Twelve Months     Twelve Months        
    Ended     Ended     Ended     Increase  
Cash Flow Summary — Continuing Operations   December 31,     December 31,     December 31,     (Decrease)  
(dollars in millions)   2009     2008     2007     2009 vs. 2008     2008 vs. 2007  
 
                                       
Cash provided by (used in) operating activities before reorganization items
  $ 199     $ 139     $ (38 )   $ 60     $ 177  
Cash used in reorganization activities
          (380 )     (80 )     380       (300 )
 
                             
Cash provided by (used in) operating activities
    199       (241 )     (118 )     440       (123 )
Cash used in investing activities
    (28 )     (50 )     (218 )     22       168  
Cash provided by (used in) financing activities
    (19 )     353       279       (372 )     74  
 
                             
Net change in cash for period attributable to continuing operations
  $ 152     $ 62     $ (57 )   $ 90     $ 119  
 
                             
Operating activities: Cash provided by operating activities in 2009 increased as compared to 2008 due to lower payments on interest expense, taxes, our annual incentive plan and our other postretirement obligations in addition to significantly reduced working capital requirements and a lack of reorganization activities in 2009 as partially offset by higher cash payments on restructuring activities and pension contributions. As discussed previously, our average debt outstanding and weighted average interest rate in 2009 declined approximately $350 million and 100 basis points, respectively, as compared to 2008 which resulted in lower interest payments. Tax payments were lower in 2009 predominately due to the receipt of an income tax refund of $8 million related to prior year operations in Germany. In response to the global economic slowdown that began in the fourth quarter of 2008, we significantly reduced our 2008 annual incentive plan payout which was targeted for payment in the first quarter of 2009 and aggressively reduced our working capital requirements in order to enhance liquidity. With the return of our annual incentive plan in 2010, we expect payments on this plan to resume in 2011 while lean manufacturing practices and minimal working capital requirements will continue to be a focus of management. The lower payments on other postretirement obligations resulted from the implementation of a plan amendment upon our emergence from bankruptcy resulting in lower company requirements along with the establishment of a fund restricted to pay certain liabilities assumed by us upon the Solutia Spinoff (“Legacy Liabilities”). Lower payments in other postretirement obligation payments are expected to continue indefinitely, in part, because the balance remaining in this restricted fund at December 31, 2009, attributable substantially to pre-spin other post retirement obligations, is $174 million, which effectively defeases the corresponding Legacy Liability. We will, however, continue to remain liable for payments on other postretirement obligations which are not included within the definition of Legacy Liabilities. Contributions to our U.S. pension plans increased $19 million in 2009 despite lower minimum funding requirements as we made a $39 million voluntary contribution in the fourth quarter 2009.
Cash used in operating activities in 2008 increased as compared to 2007 due to higher cash used in reorganization activities, primarily due to cash outflows required to facilitate our emergence from bankruptcy, as partially offset by improvement in cash provided by operating activities before reorganization items. The improvement in cash provided by operating activities before reorganization items is primarily due to higher earnings, after adjusting for noncash items, and lower payments on our pension and other postretirement obligations, partially offset by higher tax payments as driven by higher ex-US earnings. Required contributions to our pension plans decreased $86 million in 2008 and payments on other postretirement obligations were reduced $15 million via reimbursement by the restricted fund discussed above.

 

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Investing activities: Cash used in investing activities decreased in 2009 as compared to 2008 due to lower capital expenditures of $55 million as partially offset by lower proceeds from the sale of certain assets. In 2009, the majority of growth related capital projects were suspended in reaction to the global economic slowdown. In 2008, we received proceeds of $43 million from the sale of our corporate headquarters building while in 2009, we received proceeds of $4 million from the Thiurams Sale and $2 million from the Plastic Products Sale.
Cash used in investing activities decreased in 2008 as compared to the prior year due to the receipt of $43 million in 2008 from the sale of our corporate headquarters coupled with acquisition payments in 2007 of $127 million. The acquisition payments in 2007 are primarily attributable to the payment of $115 million for the Flexsys Acquisition, $7 million to purchase certain assets of Acquired Technology, Inc., a window film components business, and $4 million to purchase a specialty rubber chemicals business from Chemetall GmbH. Capital spending remained flat at $99 million as higher spending on growth initiatives was offset by lower spending on maintenance projects. Specific growth projects in 2008 included the completion of a third SAFLEX® plastic interlayer line at our Ghent, Belgium plant; expansion of our PVB resin manufacturing operations at our Springfield, Massachusetts plant; and construction of a new CPFilms coating and lamination line at our Martinsville, Virginia plant. Spending on maintenance and safety initiatives for 2008 and 2007 were $32 million and $42 million, respectively.
Financing activities: Cash used in financing activities increased in 2009 as compared to 2008 primarily due to our emergence from bankruptcy in 2008. This event required a complete recapitalization of our debt and equity structure and, after repayment of all debt obligations outstanding, resulted in net proceeds of $351 million. Of this amount, $250 million was used to establish certain funds restricted for future payments related to Legacy Liabilities and the remainder was used to pay certain secured and administrative claims and to provide additional liquidity for operations. In 2009, we completed a stock offering of 24.7 million shares of our common stock at $5 per share which resulted in net proceeds of $119 million. The proceeds from this offering, along with proceeds received on the sale of our Integrated Nylon business and cash provided by operations, were utilized to fully repay our Revolver and $12 million on our Term Loan. Also in 2009, we completed the issuance of the 2017 Notes in exchange for net proceeds, after incorporating all transaction fees, of $379 million. From these proceeds, $300 million was used to repay a portion of our Term Loan.
Cash provided by financing activities increased in 2008 compared to 2007 as a result of our emergence from bankruptcy. This event required a complete recapitalization of our debt and equity structure as discussed above. Subsequent to our emergence from bankruptcy, we completed a sale and leaseback on our corporate headquarters and two common stock offerings comprised of 22.3 million shares of common stock at $13 per share and 10.7 million shares of common stock at $14 per share, respectively (“2008 Offerings”). Proceeds from the sale of our corporate headquarters were used to repay $19 million in debt outstanding on the building. Net proceeds of $422 million from the 2008 Offerings were used to repay our Bridge, which was issued at emergence, and to provide additional liquidity for operations.
Working Capital — Continuing Operations
Working capital used for continuing operations is summarized as follows:
                         
    Successor        
Working Capital — Continuing Operations   December 31,     December 31,     Increase  
(dollars in millions)   2009     2008     (Decrease)  
 
                       
Cash and cash equivalents
  $ 243     $ 32          
Trade receivables, net
    268       227          
Inventories
    257       341          
Other current assets
    119       195          
 
                   
Total current assets
  $ 887     $ 795          
 
                   
 
                       
Accounts payable
  $ 169     $ 170          
Accrued liabilities
    206       259          
Short-term debt, including current portion of long-term debt
    28       37          
 
                   
Total current liabilities
  $ 403     $ 466          
 
                   
 
                       
Working Capital
  $ 484     $ 329     $ 155  
 
                 

 

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Reflecting our 2009 focus of enhancing our liquidity position, working capital used for continuing operations increased $155 million predominantly due to higher cash and cash equivalents and lower short-term debt. Further contributing to the higher working capital balance in 2009 is a higher accounts receivable balance which is due to the significant increase in net sales experienced in the fourth quarter of 2009 as compared to the same period in 2008. These increases are partially offset by lower inventories, reflecting certain lean manufacturing initiatives, and lower current assets due to the receipt of $28 million from a restricted cash account funded at emergence to reimburse us for environmental remediation activities. Further contributing to the higher working capital in 2009 is a decrease in accrued liabilities due to lower liabilities on foreign currency forward contracts of $35 million and a $23 million reduction in the annual incentive plan liability.
Beginning subsequent to our emergence from bankruptcy, from time to time we sell trade receivables without recourse to third parties. These trade receivables are removed from our Consolidated Statement of Financial Position and reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows at the time of sale to the third party. Uncollected trade receivables sold under these arrangements and removed from the Consolidated Statement of Financial Position were $8 million and $20 million at December 31, 2009 and 2008, respectively. The average monthly amounts of trade receivables sold were $9 million for the twelve months ended December 31, 2009.
Cash Flows — Discontinued Operations
                                         
    Successor     Combined     Predecessor        
    Twelve Months     Twelve Months     Twelve Months        
    Ended     Ended     Ended     Increase  
Cash Flow Summary — Discontinued Operations   December 31,     December 31,     December 31,     (Decrease)  
(dollars in millions)   2009     2008     2007     2009 vs. 2008     2008 vs. 2007  
 
                                       
Cash provided by (used in) operating activities
  $ 52     $ (152 )   $ 67     $ 204     $ (219 )
Cash provided by (used in) investing activities
    7       (51 )     13       58       (64 )
 
                             
Net change in cash for period attributable to discontinued operations
  $ 59     $ (203 )   $ 80     $ 262     $ (283 )
 
                             
On June 1, 2009, we sold our Integrated Nylon business for $50 million in cash, subject to adjustment for changes in working capital, a two percent equity stake in the new company and $4 million in deferred cash. Throughout 2009, including the period from the point we entered into the sale agreement and up to the date the sale closed, we aggressively worked to monetize the working capital balances historically required by this business, which resulted in increased cash provided by operating activities for discontinued operations compared to 2008. Because the working capital balances of the business at close were less than anticipated, a final working capital adjustment of $25 million was offset against the sales price resulting in our receipt of $25 million of net proceeds. A reduction in cash used for capital expenditures accounts for the remaining increase in cash provided by investing activities.
Cash used in operating activities for discontinued operations increased in 2008 compared to 2007 due to lower earnings from our Integrated Nylon business and restructuring payments associated with the idling of certain manufacturing lines as partially offset by a decrease in working capital balances. Cash provided by investing activities decreased in 2008 compared to 2007 due to the sale of DEQUEST® and sales of surplus land adjacent to our Integrated Nylon plants for $56 million and $10 million, respectively.

 

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Debt Covenants
Our Financing Agreements include a number of customary covenants and events of default, including the maintenance of certain financial covenants that restrict our ability to, among other things, incur additional debt; make certain investments; pay dividends, repurchase stock, sell certain assets or merge with or into other companies; enter into new lines of business; make capital expenditures; and prepay, redeem or exchange our debt. The financial covenants for the measurement period ended December 31, 2009 are (i) Leverage Ratio: limitation of maximum leverage ratio comprised of gross debt to trailing twelve-month continuing operations Adjusted EBITDA or earnings from continuing operations before interest, income taxes, depreciation and amortization, reorganization items, non-cash stock compensation expense and unusual gains and charges (as that term is defined in the Financing Agreements); (ii) Fixed Charge Ratio: maintenance of a minimum fixed charge coverage ratio comprised of trailing twelve-month continuing operations Adjusted EBITDA, as reduced by trailing twelve-month continuing operations capital expenditures, to Fixed Charges (as defined in the Financing Agreements, as the sum of annualized cash interest expense, net, trailing twelve months cash income taxes and annualized debt amortization under our Term Loan) ratio; and (iii) Maximum Capital Expenditures. Below is a summary of our actual performance under these financial covenants as of December 31, 2009 along with a summary of the contractually agreed to financial covenants for 2010.
                                                 
    December 31,     March 31,     June 30,     September 30,     December 31,  
    2009     2010     2010     2010     2010  
    Actual     Covenant     Covenant     Covenant     Covenant     Covenant  
 
                                               
Max Leverage Ratio
    3.23       4.50       4.50       4.50       4.50       4.50  
 
                                               
Min Fixed Charge Ratio
    2.70       1.15       1.35       1.35       1.35       1.35  
 
                                               
Max Capital Expenditures
  $ 44     $ 252       n.a.       n.a.       n.a.     $ 306  
Capital Expenditures
Capital expenditures are projected to be in the range of $50 million to $60 million during 2010 of which $30 million to $35 million of the projected range is attributable to new products and expansion and productivity projects while the remainder is attributable to maintenance and right-to-operate projects.
Pension Contributions
We sponsor several defined benefit pension plans whereby we made cash contributions of $76 million and $54 million to the plans during 2009 and 2008, respectively. We expect to contribute approximately $50 million in cash to these pension plans during 2010 but actual contributions to the plans may differ as a result of a variety of factors, including changes in laws that impact funding. Our ultimate cash flow impact required to satisfy these outstanding liabilities will depend on numerous variables, including future changes in actuarial assumptions, legislative changes to pension funding laws, market conditions and if we choose to satisfy these requirements in the form of stock contributions.
Off-Balance Sheet Arrangements
See Note 17 — Commitments and Contingencies — to the accompanying consolidated financial statements for a summary of off-balance sheet arrangements as of December 31, 2009.
Contingencies
See Note 17 — Commitments and Contingencies — to the accompanying consolidated financial statements for a summary of our contingencies as of December 31, 2009.
Commitments
Our current subsidiaries CPFilms Inc., Flexsys America L.P., Flexsys America Co., Monchem International, Inc., Solutia Inter-America, Inc., Solutia Overseas, Inc., S E Investment LLC and future subsidiaries as defined by the Financing Agreements, subject to certain exceptions (the “Guarantors”) are guarantors of our obligations under the Financing Agreements and the 2017 Notes. The Financing Agreements and the related guarantees are secured by liens on substantially all of our and the Guarantors’ present and future assets.

 

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The following table summarizes our contractual obligations and commercial commitments as of December 31, 2009.
                                                 
    Obligations Due by Period (Dollars in Millions)  
                                    2013-     2015 and  
Contractual Obligations   Total     2010     2011     2012     2014     thereafter  
Short-Term Debt
  $ 16     $ 16     $     $     $     $  
Long-Term Debt, including current portion
    1,276       12       12       12       840       400  
Interest Payments Related to Long-Term Debt
    538       98       97       97       141       105  
Operating Leases
    52       11       9       8       11       13  
Unconditional Purchase Obligations(a)
    133       92       29       8       4        
Standby Letters of Credit(b)
    49       43       5       1              
Postretirement Obligations(c)
    414       68       96       78       128       44  
Environmental Remediation
    291       31       31       35       53       141  
Uncertain Tax Positions(d)
    2       2                          
 
                                   
Total Contractual Obligations
  $ 2,771     $ 373     $ 279     $ 239     $ 1,177     $ 703  
 
                                   
     
(a)  
Unconditional purchase obligations primarily represent minimum non-cancelable future commitments to purchase raw materials and energy.
 
(b)  
Standby letters of credit contractually expiring in 2009 are generally anticipated to be renewed or extended by extensions with existing standby letters of credit providers.
 
(c)  
Represents estimated future minimum funding requirements for funded pension plans and other postretirement plans and estimated future benefit payments for unfunded pension and other postretirement plans.
 
(d)  
In addition to the $2 million reported in the 2010 column and classified as a current liability, we have $34 million recorded in other liabilities on the Consolidated Statement of Financial Position for which it is not reasonably possible to predict when it may be paid.
Recently Issued Accounting Standards
See Note 3 — Significant Accounting Policies — to the accompanying consolidated financial statements for a summary of recently issued accounting standards.
ITEM 7A.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under “Derivative Financial Instruments” on pages 40 and 41 is incorporated by reference.

 

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ITEM 8.  
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL SECTION — TABLE OF CONTENTS
         
    Page Number  
 
       
    48  
 
       
    50  
 
       
    50  
 
       
    51  
 
       
    52  
 
       
    53  
 
       
    54  
 
       

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Solutia Inc.:
We have audited the accompanying consolidated statement of financial position of Solutia Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008 (Successor Company statements of financial position), and the related consolidated statements of operations, shareholders’ equity (deficit), comprehensive income (loss) and cash flows for the twelve months ended December 31, 2009 (Successor Company operations), the ten months ended December 31, 2008 (Successor Company operations), the two months ended February 29, 2008 (Predecessor Company operations) and for the twelve months ended December 31, 2007 (Predecessor Company operations). Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As discussed in Note 1 to the consolidated financial statements, on November 29, 2007, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective on February 28, 2008. Accordingly, the accompanying consolidated financial statements have been prepared for the Successor Company as a new entity with assets, liabilities and a capital structure having carrying values not comparable with prior periods as described in Note 1 to the consolidated financial statements.

 

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In our opinion, the Successor Company consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solutia Inc. and subsidiaries as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the twelve months ended December 31, 2009 and the ten months ended December, 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company consolidated financial statements referred to above present fairly, in all material respects, the results of its operations and its cash flows for the two months ended February 29, 2008, and for the twelve months ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 4 to the consolidated financial statements, the Company sold its integrated nylon business on June 1, 2009. The assets and liabilities, results of operations, loss on sale and cash flows of the integrated nylon business are presented as discontinued operations in the consolidated financial statements.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 17, 2010

 

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SOLUTIA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars and shares in millions, except per share amounts)
                                   
    Successor       Predecessor  
    Twelve Months     Ten Months       Two Months     Twelve Months  
    Ended     Ended       Ended     Ended  
    December 31,     December 31,       February 29,     December 31,  
    2009     2008       2008     2007  
Net Sales
  $ 1,667     $ 1,775       $ 335     $ 1,643  
Cost of goods sold
    1,197       1,408         241       1,260  
 
                         
Gross Profit
    470       367         94       383  
Selling, general and administrative expenses
    227       243         42       218  
Research, development and other operating expenses, net
    10       9         3       24  
 
                         
Operating Income
    233       115         49       141  
Equity earnings from affiliates
                        12  
Interest expense (a)
    (159 )     (141 )       (21 )     (134 )
Other income, net
          24         3       34  
Loss on debt modification
                        (7 )
Reorganization items, net
                  1,433       (298 )
 
                         
Income (Loss) from Continuing Operations Before Income Tax Expense
    74       (2 )       1,464       (252 )
Income tax expense
    14       13         214       17  
 
                         
Income (Loss) from Continuing Operations
    60       (15 )       1,250       (269 )
Income (Loss) from Discontinued Operations, net of tax
    (169 )     (648 )       204       64  
 
                         
Net Income (Loss)
    (109 )     (663 )       1,454       (205 )
Net Income attributable to noncontrolling interest
    4       5               3  
 
                         
Net Income (Loss) attributable to Solutia
  $ (113 )   $ (668 )     $ 1,454     $ (208 )
 
                         
 
                                 
Basic and Diluted Income (Loss) per Share attributable to Solutia:
                                 
Income (Loss) from Continuing Operations attributable to Solutia
  $ 0.53     $ (0.27 )     $ 11.96     $ (2.60 )
Income (Loss) from Discontinued Operations
    (1.59 )     (8.67 )       1.95       0.61  
 
                         
Net Income (Loss) attributable to Solutia
  $ (1.06 )   $ (8.94 )     $ 13.91     $ (1.99 )
 
                         
     
(a)  
Predecessor excludes unrecorded contractual interest expense of $5 in the two months ended February 29, 2008 and $32 in the year ended December 31, 2007.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
                                   
    Successor       Predecessor  
    Twelve Months     Ten Months       Two Months     Twelve Months  
    Ended     Ended       Ended     Ended  
    December 31,     December 31,       February 29,     December 31,  
    2009     2008       2008     2007  
Net Income (Loss)
  $ (109 )   $ (663 )     $ 1,454     $ (205 )
Other Comprehensive Income (Loss):
                                 
Currency translation adjustments
    42       (97 )       32       31  
Net unrealized gain (loss) on derivative instruments
    4       (26 )              
Realized loss on derivative instruments
    1                      
Pension settlement charge
    31                      
Amortization of prior service gain
                  (3 )     (17 )
Amortization of net actuarial (gain) loss
    (4 )             2       16  
Actuarial loss arising during the period
    (25 )     (162 )       (64 )     (8 )
Prior service gain arising during the period
                  109          
Fresh-start accounting adjustment
                  (30 )      
 
                         
Comprehensive Income (Loss)
    (60 )     (948 )       1,500       (183 )
Comprehensive Income attributable to noncontrolling interest
    4       6               4  
 
                         
Comprehensive Income (Loss) attributable to Solutia
  $ (64 )   $ (954 )     $ 1,500     $ (187 )
 
                         
See accompanying Notes to Consolidated Financial Statements.

 

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SOLUTIA INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in millions, except per share amounts)
                 
    Successor  
    December 31,     December 31,  
    2009     2008  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 243     $ 32  
Trade receivables, net of allowances of $2 in 2009 and $0 in 2008
    268       227  
Miscellaneous receivables
    82       110  
Inventories
    257       341  
Prepaid expenses and other assets
    37       85  
Assets of discontinued operations
    10       490  
 
           
Total Current Assets
    897       1,285  
Property, Plant and Equipment, net of accumulated depreciation of $128 in 2009 and $56 in 2008
    919       952  
Goodwill
    511       511  
Identified Intangible Assets, net
    803       823  
Other Assets
    136       163  
 
           
Total Assets
  $ 3,266     $ 3,734  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 169     $ 170  
Accrued liabilities
    206       259  
Short-term debt, including current portion of long-term debt
    28       37  
Liabilities of discontinued operations
    50       302  
 
           
Total Current Liabilities
    453       768  
Long-Term Debt
    1,264       1,359  
Postretirement Liabilities
    411       465  
Environmental Remediation Liabilities
    260       279  
Deferred Tax Liabilities
    179       202  
Other Liabilities
    99       132  
 
               
Commitments and Contingencies (Note 17)
               
 
               
Shareholders’ Equity:
               
Common stock at $0.01 par value; (500,000,000 shares authorized, 121,869,293 and 94,392,772 shares issued in 2009 and 2008, respectively)
    1       1  
Additional contributed capital
    1,612       1,474  
Treasury shares, at cost (430,203 and 77,132 in 2009 and 2008, respectively)
    (2 )      
Accumulated other comprehensive loss
    (237 )     (286 )
Accumulated deficit
    (781 )     (668 )
 
           
Total Shareholders’ Equity attributable to Solutia
    593       521  
Equity attributable to noncontrolling interest
    7       8  
 
           
Total Shareholders’ Equity
    600       529  
 
           
Total Liabilities and Shareholders’ Equity
  $ 3,266     $ 3,734  
 
           
See accompanying Notes to Consolidated Financial Statements.

 

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SOLUTIA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
                                   
    Successor       Predecessor  
    Twelve Months     Ten Months       Two Months     Twelve Months  
    Ended     Ended       Ended     Ended  
    December 31,     December 31,       February 29,     December 31,  
    2009     2008       2008     2007  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
                                 
OPERATING ACTIVITIES:
                                 
Net income (loss)
  $ (109 )   $ (663 )     $ 1,454     $ (205 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
                                 
(Income) Loss from discontinued operations, net of tax
    169       648         (204 )     (64 )
Depreciation and amortization
    107       89         11       59  
Revaluation of assets and liabilities, net of tax
                  (1,383 )      
Discharge of claims and liabilities, net of tax
                  100        
Other reorganization items, net
                  52       298  
Pension obligation related expense less than contributions
    (72 )     (39 )       (18 )     (143 )
Other postretirement benefit obligation related expense less than contributions
    (12 )     (13 )       (6 )     (39 )
Deferred income taxes
    1       (21 )       5       (13 )
Amortization of debt issuance costs
    20       15               3  
Equity earnings from affiliates
                        (12 )
(Gain) Loss on sale of other assets
    2       (8 )              
Other (gains) charges including restructuring expenses
    68       97         (2 )     35  
Other, net
    2                      
Changes in assets and liabilities, net of acquisitions and divestitures:
                                 
Income taxes payable
    (7 )     (7 )       5       14  
Trade receivables
    (43 )     91         (24 )     (34 )
Inventories
    80       (7 )       (34 )     (5 )
Accounts payable
    14       (31 )       31       12  
Restricted cash to fund payment of legacy liabilities
    28       18                
Environmental remediation liabilities
    (18 )     (18 )       (1 )      
Other assets and liabilities
    (31 )     4         (2 )     56  
 
                         
Cash Provided by (Used in) Continuing Operations before Reorganization Activities
    199       155         (16 )     (38 )
Reorganization Activities:
                                 
Establishment of VEBA retiree trust
                  (175 )      
Establishment of restricted cash for environmental remediation and other legacy payments
                  (46 )      
Payment for allowed secured and administrative claims
                  (79 )      
Professional service fees
          (31 )       (31 )     (72 )
Other reorganization and emergence related payments
          (1 )       (17 )     (8 )
 
                         
Cash Used in Reorganization Activities
          (32 )       (348 )     (80 )
 
                         
Cash Provided by (Used in) Operations—Continuing Operations
    199       123         (364 )     (118 )
Cash Provided by (Used in) Operations—Discontinued Operations
    52       (104 )       (48 )     67  
 
                         
Cash Provided by (Used in) Operations
    251       19         (412 )     (51 )
 
                         
 
                                 
INVESTING ACTIVITIES:
                                 
Property, plant and equipment purchases
    (44 )     (84 )       (15 )     (99 )
Acquisition and investment payments
    (2 )     (4 )             (131 )
Restricted cash
    9                     4  
Investment proceeds and property disposals
    9       53               8  
 
                         
Cash Used in Investing Activities—Continuing Operations
    (28 )     (35 )       (15 )     (218 )
Cash Provided by (Used in) Investing Activities—Discontinued Operations
    7       (37 )       (14 )     13  
 
                         
Cash Used in Investing Activities
    (21 )     (72 )       (29 )     (205 )
 
                         
 
                                 
FINANCING ACTIVITIES:
                                 
Net change in lines of credit
    (14 )     25               14  
Proceeds from long-term debt obligations
    470               1,600       75  
Net change in long-term revolving credit facilities
    (181 )     (5 )       190       (61 )
Proceeds from stock issuances
    119       422         250        
Proceeds from short-term debt obligations
    22                     325  
Payment of short-term debt obligations
    (17 )             (966 )     (53 )
Payment of long-term debt obligations
    (386 )     (437 )       (366 )     (4 )
Payment of debt obligations subject to compromise
                  (221 )      
Debt issuance costs
    (25 )     (1 )       (136 )     (11 )
Purchase of treasury shares
    (2 )                    
Other, net
    (5 )     (2 )             (6 )
 
                         
Cash Provided by (Used in) Financing Activities
    (19 )     2         351       279  
 
                         
 
                                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    211       (51 )       (90 )     23  
 
                                 
CASH AND CASH EQUIVALENTS:
                                 
Beginning of period
    32       83         173       150  
 
                         
End of period
  $ 243     $ 32       $ 83     $ 173  
 
                         
See accompanying Notes to Consolidated Financial Statements.

 

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SOLUTIA INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(Dollars in millions)
                                                                 
    Equity attributable to Solutia              
                    Net             Accumulated             Equity        
            Additional     Deficiency             Other             Attributable to     Total  
    Common     Contributed     of Assets at     Treasury     Comprehensive     Accumulated     Noncontrolling     Shareholders’  
    Stock     Capital     Spinoff     Stock     Loss     Deficit     Interest     Equity (Deficit)  
Predecessor, January 1, 2007
  $ 1     $ 56     $ (113 )   $ (251 )   $ (67 )   $ (1,031 )   $ 4     $ (1,430 )
Comprehensive income:
                                                               
Net income (loss)
                                  (208 )     3       (205 )
Accumulated currency adjustments
                            30             1       31  
Amortization of prior service gain
                            (17 )                 (17 )
Actuarial loss arising during the year, net of tax of $(1)
                            (8 )                 (8 )
Amortization of actuarial loss, net of tax of $1
                            16                   16  
Dividends attributable to noncontrolling interest
                                        (2 )     (2 )
Effect of adopting certain provisions of ASC 740
                                  (3 )           (3 )
 
                                               
Predecessor, December 31, 2007
    1       56       (113 )     (251 )     (46 )     (1,242 )     6       (1,589 )
 
                                               
 
 
Comprehensive income:
                                                               
Net income
                                  1,454             1,454  
Accumulated currency adjustments
                            32                   32  
Actuarial loss arising during the period
                            (64 )                 (64 )
Amortization of actuarial loss
                            2                   2  
Prior service gain arising during the period
                            109                   109  
Amortization of prior service gain
                            (3 )                 (3 )
Fresh-start elimination
                            (30 )                 (30 )
Fresh-start elimination
          (56 )     113       251             (212 )           96  
Cancellation of old common stock
    (1 )                                         (1 )
 
                                               
Predecessor, February 29, 2008
                                        6       6  
Issuance of new common stock
    1       1,036                                     1,037  
 
                                               
Successor, February 29, 2008
    1       1,036                               6       1,043  
 
                                               
 
 
Comprehensive income:
                                                               
Net income (loss)
                                  (668 )     5       (663 )
Accumulated currency adjustments
                            (98 )           1       (97 )
Actuarial loss arising during the period, net of tax of $4
                            (162 )                 (162 )
Net unrealized loss on derivative instruments
                            (26 )                 (26 )
Dividends attributable to noncontrolling interest
                                        (5 )     (5 )
Investment attributable to noncontrolling interest
                                        1       1  
Issuance of common stock
          425                                     425  
Share-based compensation expense
          13                                     13  
 
                                               
Successor, December 31, 2008
    1       1,474                   (286 )     (668 )     8       529  
 
                                               
 
 
Comprehensive income:
                                                               
Net income (loss)
                                  (113 )     4       (109 )
Accumulated currency adjustments
                            42                   42  
Net unrealized gain on derivative instruments
                            4                   4  
Realized loss on derivative instruments
                            1                   1  
Pension settlement charge
                            31                   31  
Actuarial loss arising during the year, net of tax of $(6)
                            (25 )                 (25 )
Amortization of net actuarial gain
                            (4 )                 (4 )
Dividends attributable to noncontrolling interest
                                        (5 )     (5 )
Issuance of common stock
          119                                     119  
Treasury stock purchases
                      (2 )                       (2 )
Share-based compensation expense
          19                                     19  
 
                                               
 
 
Successor, December 31, 2009
  $ 1     $ 1,612     $     $ (2 )   $ (237 )   $ (781 )   $ 7     $ 600  
 
                                               
See accompanying Notes to Consolidated Financial Statements.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts or otherwise noted)
1. Background and Basis for Presentation
Solutia Inc., together with its subsidiaries, is a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. Solutia is a world leader in performance films for laminated safety glass and after-market applications; and specialty products such as chemicals for the rubber industry, solar energy, process manufacturing and aviation industries.
Unless the context requires otherwise, the terms “Solutia”, “Company”, “we”, and “our” herein refer to Solutia Inc. and its subsidiaries.
Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation (“Pharmacia”), a 100% owned subsidiary of Pfizer, Inc.). On September 1, 1997, Pharmacia distributed all of the outstanding shares of common stock of Solutia as a dividend to Pharmacia stockholders (the “Solutia Spinoff”). As a result of the Solutia Spinoff, we became an independent publicly held company and our operations ceased to be owned by Pharmacia.
On December 17, 2003, we and our 14 U.S. subsidiaries filed voluntary petitions for Chapter 11 protection (the “Chapter 11 Case”) to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain postretirement benefits (the “Legacy Liabilities”) and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. Our subsidiaries outside the United States were not included in the Chapter 11 filing. On February 28, 2008 (the “Effective Date”), we consummated our reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) and emerged from bankruptcy pursuant to our Fifth Amended Joint Plan of Reorganization, which was confirmed by the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) on November 29, 2007 (the “Plan”).
The consolidated financial statements for the period in which we were in bankruptcy were prepared in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 852 Reorganizations (“ASC 852”). The consolidated financial statements were also prepared on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. Upon our emergence from bankruptcy, we adopted fresh-start accounting in accordance with ASC 852. However, due to the proximity of the Effective Date to the February month end, for accounting convenience purposes, we have reported the effects of fresh-start accounting as if they occurred on February 29, 2008. This resulted in our becoming a new reporting entity on March 1, 2008, which has a new capital structure, a new basis in the identifiable assets and liabilities assumed and no retained earnings or accumulated losses. Accordingly, the Consolidated Financial Statements on or after March 1, 2008 are not comparable to the Consolidated Financial Statements prior to that date. The financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Solutia Inc. and its subsidiaries for the periods following March 1, 2008 (“Successor”), and of Solutia Inc. and its subsidiaries for the periods through February 29, 2008 (“Predecessor”).
We have evaluated subsequent events through February 17, 2010, the date which the financial statements were issued, and have concluded that no material events or transactions took place.
2. Fresh-Start Accounting
Fresh-start accounting reflects our value as determined in the Plan. Under fresh-start accounting, our asset values were re-measured using fair value and were allocated in accordance with the ASC 805 Business Combinations. The excess of reorganization value over the fair value of tangible and identifiable intangible assets was recorded as goodwill. In addition, fresh-start accounting also requires that all liabilities, other than deferred taxes, should be stated at fair value or at the present values of the amounts to be paid using appropriate market interest rates. Deferred taxes are determined in conformity with ASC 740 Income Taxes (“ASC 740”).
To facilitate the calculation of the enterprise value of the Successor, management developed a set of financial projections using a number of estimates and assumptions. The enterprise value, and corresponding equity value, was based on these financial projections in conjunction with various valuation methods, including (i) a comparison of us and our projected performance to comparable companies; (ii) a review and analysis of several recent transactions of companies in similar industries to ours; and (iii) a calculation of the present value of our future cash flows under our projections. Utilizing these methodologies, the enterprise value was determined to be within a certain range and, using the mid-point of the range, the equity value of the Successor was estimated to be $1.0 billion.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
All estimates, assumptions, valuations, appraisals and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions, valuations, appraisals and the financial projections will be realized and actual results could vary materially.
The adjustments set forth in the following Fresh Start Consolidated Statement of Financial Position in the columns captioned “Effect of Plan” and “Revaluation of Assets and Liabilities” reflect the effect of the consummation of the transactions contemplated by the Plan, including the settlement of various liabilities, securities issuances, incurrence of new indebtedness and cash payments, and the revaluation of our assets and liabilities to reflect their fair value under fresh-start accounting. The adjustments resulted in a pre-tax net effect of discharge of claims and liabilities of $(104) under the Plan and a gain of $1,801 resulting from the revaluation of our assets and liabilities, of which $212 was recognized in income (loss) from discontinued operations on the Consolidated Statement of Operations for the two months ended February 29, 2008.
The effects of the Plan and fresh-start accounting on our Consolidated Statement of Financial Position at February 29, 2008 are as follows:
                                 
    Predecessor                   Successor  
                    Revaluation of          
    February 29,     Effect of     Assets and     February 29,  
    2008     Plan     Liabilities     2008  
ASSETS
                               
Current Assets:
                               
Cash and cash equivalents
  $ 180     $ (97 )(a)   $     $ 83  
Trade receivables
    317                   317  
Miscellaneous receivables
    128       (3 ) (a)     (1 )(d)     124  
Inventories
    302             98 (d)     400  
Prepaid expenses and other assets
    56       30 (a)(b)     (5 )(d)     81  
Assets of discontinued operations
    863             218 (d)     1,081  
 
                       
Total Current Assets
    1,846       (70 )     310       2,086  
Property, Plant and Equipment
    629             406 (d)     1,035  
Goodwill
    150             370 (e)     520  
Identified Intangible Assets
    56             825 (d)     881  
Other Assets
    113       112 (a)(b)     (3 )(d)     222  
 
                       
Total Assets
  $ 2,794     $ 42     $ 1,908     $ 4,744  
 
                       
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                               
Current Liabilities:
                               
Accounts payable
  $ 234     $     $     $ 234  
Accrued liabilities
    234       17 (a)     15 (d)     266  
Short-term debt, including current portion of long-term debt
    1,098       (1,085 )(b)           13  
Liabilities of discontinued operations
    297       87       2 (d)     386  
 
                       
Total Current Liabilities
    1,863       (981 )     17       899  
Long-Term Debt
    386       1,410 (b)           1,796  
Postretirement Liabilities
    86       282 (a)           368  
Environmental Remediation Liabilities
    55       207 (a)     29 (d)     291  
Deferred Tax Liabilities
    47       (12 ) (a)     194 (d)     229  
Other Liabilities
    77       34 (a)     7 (d)     118  
 
                       
Total Liabilities not Subject to Compromise
    2,514       940       247       3,701  
 
                               
Liabilities Subject to Compromise
    1,962       (1,962 )(a)            
 
                               
Shareholders’ Equity (Deficit):
                               
Successor common stock at $0.01 par value
          1 (c)           1  
Predecessor common stock at $0.01 par value
    1             (1 )(c)      
Additional contributed capital
    56       1,036 (c)     (56 )(c)     1,036  
Predecessor stock held in treasury, at cost
    (251 )           251 (c)      
Predecessor net deficiency of assets at spin-off
    (113 )           113 (c)      
Accumulated other comprehensive income (loss)
    (97 )     127 (a)     (30 )(c)      
Accumulated deficit
    (1,284 )     (100 )(c)     1,384 (c)      
 
                       
Total Shareholders’ Equity (Deficit) attributable to Solutia Inc.
    (1,688 )     1,064       1,661       1,037  
Equity attributable to noncontrolling interest
    6                   6  
 
                       
Total Shareholders’ Equity (Deficit)
    (1,682 )     1,064       1,661       1,043  
 
                       
Total Liabilities and Shareholders’ Equity (Deficit)
  $ 2,794     $ 42     $ 1,908     $ 4,744  
 
                       
     
(a)  
To record the discharge and payment of liabilities subject to compromise, payment of accrued post-petition interest, the re-establishment of liabilities to be retained by Successor, the defeasance of a substantial amount of our postretirement liabilities and the establishment of a fund restricted to the payment of certain Legacy Liabilities.
 
(b)  
To record the extinguishment of Predecessor debt and the write-off of any related unamortized debt financing costs and the establishment of Successor debt financing and related financing costs pursuant to our financing agreements.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
     
(c)  
To record the net effect of discharge of claims and liabilities subject to compromise, gain on the revaluation of assets and liabilities, cancellation of Predecessor common stock, close out of remaining equity balances of Predecessor in accordance with fresh-start accounting, and the issuance of Successor common stock and warrants to purchase common stock.
 
(d)  
To adjust assets and liabilities to fair value.
 
(e)  
The goodwill of Predecessor has been eliminated and the reorganization value in excess of amounts allocable to identified tangible and intangible assets has been classified as goodwill.
Reorganization Items, net
Reorganization items, net are presented separately in the Consolidated Statement of Operations and represent items of income, expense, gain or loss that we realized or incurred due to our reorganization under the Bankruptcy Code.
Reorganization items, net consisted of the following items:
                 
    Predecessor  
    Two Months     Twelve Months  
    Ended     Ended  
    February 29,     December 31,  
    2008     2007  
 
               
Discharge of claims and liabilities (a)
  $ (104 )   $  
Revaluation of assets and liabilities (b)
    1,589        
Professional fees (c)
    (52 )     (67 )
Severance and employee retention costs (d)
          (9 )
Adjustments to allowed claim amounts (e)
          (224 )
Settlements of pre-petition claims (f)
          2  
 
           
Total Reorganization Items, net
  $ 1,433     $ (298 )
 
           
     
(a)  
The discharge of claims and liabilities primarily relates to allowed general, unsecured claims in our Chapter 11 Case, such as (1) claims due to the rejection or modification of certain executory contracts, (2) claims relating to changes in postretirement healthcare benefits and the rejection of our non-qualified retirement plans, and (3) claims relating to the restructuring of financing arrangements.
 
(b)  
We revalued our assets and liabilities at estimated fair value as a result of fresh-start accounting. This resulted in a $1,801 pre-tax gain, of which $212 is recognized in income (loss) from discontinued operations on the Consolidated Statement of Operations, primarily reflecting the fair value of newly recognized intangible assets, the elimination of our LIFO reserve and the increase in the fair value of tangible property and equipment.
 
(c)  
Professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings.
 
(d)  
Expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain of our employees approved by the Bankruptcy Court.
 
(e)  
Adjustments to record certain pre-petition claims at estimated amounts of the allowed claims.
 
(f)  
Represents the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded.
We did not incur any reorganization items, net in the twelve months and ten months ended December 31, 2009 and 2008, respectively.
3. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). These statements pertain to Solutia and its majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Companies in which we have a significant interest but not a controlling interest are accounted for under the equity method of accounting and included in other assets in the Consolidated Statement of Financial Position. Our proportionate share of these companies’ net earnings or losses is reflected in equity earnings from affiliates in the Consolidated Statement of Operations.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements which affect revenues and expenses during the period reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates were used to account for restructuring reserves, environmental reserves, self-insurance reserves, valuations of goodwill and other intangible assets, employee benefit plans, income tax liabilities and assets and related valuation allowances, inventory obsolescence, asset impairments, value of share-based compensation, litigation and other contingencies and the allocation of corporate costs to segments. Significant estimates and assumptions are also used to establish the useful lives of depreciable tangible and finite-lived intangible assets.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased.
Trade Receivables
The provision for losses on uncollectible trade receivables is determined on the basis of past collection experience, current economic and market conditions and a review of the current status of each customer’s trade receivable.
Inventory Valuation
Inventories are stated at cost or market, whichever is less, with cost being determined using standards, which approximate actual cost. Variances, exclusive of unusual volume and operating performance, are capitalized into inventory when material. Standard cost includes direct labor and raw materials, and manufacturing overhead based on normal capacity.
The cost of all inventories in the United States, excluding supplies, is determined by the LIFO method (approximately 30 percent and 40 percent of all inventories as of December 31, 2009 and 2008, respectively). The cost of inventories outside the United States, as well as supplies inventories in the United States, is determined by the FIFO method.
We record abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) as current period charges.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and depreciated on a straight-line method over their respective estimated useful lives. In connection with our adoption of fresh-start accounting, we adjusted the net book values of property and equipment to their estimated fair values and revised the estimated useful life of machinery and equipment. The estimated useful lives for major asset classifications are as follows:
                 
    Estimated Useful Lives  
Asset Classification   Successor     Predecessor  
 
               
Buildings and Improvements
    5 to 35 years       5 to 35 years  
Machinery and Equipment
    5 to 20 years       3 to 15 years  
Goodwill and Intangible Assets
Goodwill reflects the excess of the reorganization value of the Successor over the fair value of tangible and identifiable intangible assets, net of liabilities resulting from our adoption of fresh-start accounting. Goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment as of November 30th of each year or more frequently when an event occurs or circumstances change such that it is reasonably possible that impairment may exist.
We test goodwill for impairment by first comparing the carrying value of each reporting unit, including goodwill, to its fair value. The fair value of the reporting unit is determined considering both the market and income approaches. Under the market approach, fair value is based on a comparison of similar publicly traded companies. Under the income approach, fair value is determined using an estimate of future cash flows of the reporting unit and a risk-adjusted discount rate to compute a net present value of future cash flows. If the fair value is determined to be less than carrying value, a second step is performed to compute the amount of impairment, if any. Impairment of goodwill is measured as the excess of the carrying amount of goodwill over the net fair values of recognized and unrecognized assets and liabilities of the reporting unit. We test intangible assets with indefinite lives for impairment through comparison of the fair value of the intangible asset with its carrying amount. The fair value of intangible assets with indefinite lives is determined using an estimate of future cash flows attributable to the asset and a risk-adjusted discount rate to compute a net present value of future cash flows. The shortfall of the fair value below carrying value represents the amount of impairment. See Note 6 — Goodwill and Other Intangible Assets — for further discussion of the annual impairment test.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Intangible assets that have finite useful lives are amortized over their determinable useful lives on a straight-line method and assessed for impairment in accordance with our Impairment of Long-Lived Assets accounting policy. The estimated useful lives are as follows:
                 
    Estimated Useful Lives  
    Successor     Predecessor  
 
               
Finite-Lived Intangible Assets
    5 to 27 years       5 to 25 years  
On a quarterly basis, the useful lives of these assets are evaluated to determine whether events or circumstances warrant a revision to the remaining period of amortization. If an estimate of the useful life is changed, the remaining carrying amount of the asset will be amortized prospectively over the revised remaining useful life.
Impairment of Long-Lived Assets
Impairment tests of long-lived assets are performed when conditions indicate the carrying amount may not be recoverable. Impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset value is written down to its fair value based upon market prices or, if not available, upon discounted cash value, at an appropriate discount rate.
Environmental Remediation
Costs for remediation of waste disposal sites are accrued in the accounting period in which the obligation is probable and when the cost is reasonably estimable based on current law and existing technology. Environmental liabilities are not discounted, and they have not been reduced for any claims for recoveries from third parties. In those cases where third-party indemnitors have agreed to pay any amounts and management believes that collection of such amounts is probable, the amounts are reflected as receivables in the consolidated financial statements.
Litigation and Other Contingencies
We are a party to legal proceedings involving intellectual property, tort, contract, antitrust, employee benefit, environmental, government investigations and other litigation, claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. In accordance with U.S. GAAP, accruals for such contingencies are recorded to the extent that we conclude their occurrence is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, we accrue the low end of the range. In addition, we accrue for legal costs expected to be incurred with a loss contingency.
Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, we consider many factors. These factors include, but are not limited to, past experience, scientific and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. If the assessment of the various factors changes, the estimates may change and could result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
Self-Insurance and Insurance Recoveries
We maintain self-insurance reserves to reflect our estimate of uninsured losses. Self-insured losses are accrued based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry, our historical experience and certain case specific reserves as required, including estimated legal costs. The maximum extent of the self-insurance provided by us is dependent upon a number of factors including the facts and circumstances of individual cases and the terms and conditions of the commercial policies. We have purchased commercial insurance in order to reduce our exposure to workers’ compensation, product, general, automobile and property liability claims. This insurance has varying policy limits and deductibles.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Insurance recoveries are estimated in consideration of expected losses, coverage limits and policy deductibles. When recovery from an insurance policy is considered probable, a receivable is recorded.
Foreign Currency Translation
The local currency has been used as the functional currency for nearly all worldwide locations and is translated into U.S. dollars at current or average exchange rates. Unrealized currency translation adjustments are included in accumulated other comprehensive loss in the Consolidated Statement of Financial Position.
Derivative Financial Instruments
All derivatives except those which qualify for exception, whether designated for hedging relationships or not, are recognized in the Consolidated Statement of Financial Position at their fair value.
Currency forward and option contracts are used to manage currency exposures for financial instruments denominated in currencies other than the entity’s functional currency. We have chosen not to designate these instruments as hedges and to allow the gains and losses that arise from marking the contracts to market to be included in other income, net in the Consolidated Statement of Operations.
Interest rate caps and swaps are used to manage interest rate exposures on variable rate debt instruments. To the extent interest rate caps and swaps qualify for hedge accounting, we designate them as cash flow hedges and the mark-to-market gain or loss on qualifying hedges is included in accumulated other comprehensive loss in the Consolidated Statement of Financial Position to the extent effective, and reclassified into interest expense in the Consolidated Statement of Operations in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on ineffective hedges or ineffective portions of hedges are recognized in interest expense immediately.
Revenue Recognition
Our primary revenue-earning activities involve producing and delivering goods. Revenues are considered to be earned when we have completed the process by which we are entitled to such revenues. The following criteria are used for revenue recognition: persuasive evidence that an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured.
Shipping and Handling Costs
Amounts billed for shipping and handling are included in net sales and the costs incurred for these activities are included in cost of goods sold in the Consolidated Statement of Operations.
Distribution Costs
We include inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and the other costs of our distribution network in cost of goods sold in the Consolidated Statement of Operations.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities at enacted rates. We determine the appropriateness of valuation allowances in accordance with the “more likely than not” recognition criteria.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
We recognize tax positions in the Consolidated Statement of Financial Position as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense in the Consolidated Statement of Operations.
Earnings (Loss) per Share
Basic earnings (loss) per share is a measure of operating performance that assumes no dilution from securities or contracts to issue common stock. Diluted earnings (loss) per share is a measure of operating performance by giving effect to the dilution that would occur if securities or contracts to issue common stock were exercised or converted. To the extent that stock options, non-vested restricted stock and warrants are anti-dilutive, they are excluded from the calculation of diluted earnings per share.
Share-Based Compensation
We measure compensation cost for all share-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised.
Recently Issued and Adopted Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements which are effective for fiscal years beginning after December 15, 2010. The adoption of the additional requirements of ASU 2010-06 is not expected to have any financial impact on our consolidated financial statements.
In September 2009, the FASB issued ASU 2009-12 Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities that Calculate Net Asset Value per Share (“ASU 2009-12”), which amends ASC 820 to provide clarification on the measurement and disclosure of investments in certain entities that calculate net asset value per share (“NAV”). The measurement and disclosure requirements of ASU 2009-12 are effective for the first reporting period ending after December 15, 2009. Accordingly, we adopted the requirements of this guidance effective October 1, 2009. The adoption of the guidance did not have any financial impact on our consolidated financial statements and the additional disclosure requirements can be found at Note 13 — Pension Plans and Other Postretirement Benefits.
In June 2009, the FASB issued the ASC to serve as the sole source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the Securities and Exchange Commission (“SEC”) and its staff. The ASC changes the referencing of financial standards but is not intended to change U.S. GAAP. This standard is effective for interim or annual financial periods ending after September 15, 2009. Since the ASC did not alter existing U.S. GAAP, it did not have any impact on our consolidated financial statements.
In May 2009, the FASB issued guidance referenced in ASC 855 Subsequent Events (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued and requires the disclosure of the date through which these events are evaluated. This statement is effective for interim and annual periods ending after June 15, 2009 and accordingly, we adopted this guidance effective April 1, 2009.
In April 2009, the FASB issued guidance, referenced in ASC 825 Financial Instruments (“ASC 825”), which amends U.S. GAAP to require entities to disclose the fair value of financial instruments in all interim financial statements. The additional requirements of ASC 825 also require disclosure of the method(s) and significant assumptions used to estimate the fair value of those financial instruments. Previously, these disclosures were required only in annual financial statements. The additional requirements of ASC 825 are effective for interim reporting periods ending after June 15, 2009. The adoption of the additional requirements of ASC 825 did not have any financial impact on our consolidated financial statements.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
In March 2008, the FASB issued guidance, referenced in ASC 815 Derivatives and Hedging (“ASC 815”), which requires enhanced disclosures about a company’s derivative instruments and hedging activities and was effective for fiscal years beginning after November 15, 2008. The adoption of ASC 815 on January 1, 2009 did not have any financial impact on our consolidated financial statements and the additional disclosures can be found at Note 11 — Derivatives and Risk Management.
In February 2008, the FASB issued guidance, referenced in ASC 820, which delayed the effective date of accounting for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. Accordingly, on January 1, 2009, we adopted the additional requirements of ASC 820 which can be found at Note 4 — Acquisitions and Divestitures.
In December 2008, the FASB issued guidance, referenced in ASC 715 Compensation — Retirement Benefits (“ASC 715”), which enhances disclosures required for pension and retirement plan assets. The guidance includes providing a description of the investment strategies and policies and providing information to allow the readers an understanding of the risk management practices. ASC 715 also requires the disclosure of the fair value of the major asset categories for the plan assets and the valuation techniques used to determine the fair values. Disclosures as a result of the new guidance are required for fiscal years ending after December 15, 2009. Accordingly, we have adopted the additional requirements of ASC 715 which can be found at Note 13 — Pension Plans and Other Postretirement Benefits.
In December 2007, the FASB issued guidance, referenced in ASC 810 Consolidation, which established new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary through the use of disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for fiscal years beginning on or after December 15, 2008 with early adoption prohibited. We have retrospectively adopted this guidance effective January 1, 2009 and as a result, have reclassified our noncontrolling interest in a joint venture for prior periods on the Consolidated Statement of Financial Position from other liabilities to a separate line item in the equity section. The income attributable to the noncontrolling interest was also reclassified from other income, net on the Consolidated Statement of Operations and Consolidated Statement of Comprehensive Income (Loss) to a separate line item.
4. Acquisitions and Divestitures
Acquisitions
On November 13, 2007, we purchased Acquired Technology, Inc. (“ATI”) for $7. The ATI acquisition provides technology to help grow and develop the broad product portfolio of our CPFilms reportable segment while immediately adding sales volume in the window film components business. The results of operations for ATI are included in the CPFilms reportable segment from the acquisition date.
On May 1, 2007, we purchased the remaining 50 percent interest in our Flexsys joint venture (“Flexsys”) simultaneous with Flexsys’ purchase of Akzo Nobel’s CRYSTEX® manufacturing operations in Japan for $25. Under the terms of the purchase agreement, we purchased Akzo Nobel’s interest in Flexsys for $213. The purchase was settled by cash payment of $115 plus the debt assumption by us of Akzo Nobel’s pro-rata share of the projected Flexsys pension liability and the outstanding balance on the existing term and revolving credit facility. Subsequent to the acquisition, we reduced the projected pension liability via the payment of $27 to the pension plan, which was classified as cash used in operating activities in the Consolidated Statement of Cash Flows. We also refinanced the existing Flexsys $200 term and revolving credit facility with a new debt agreement comprised of a $75 term loan and $150 revolving credit facility which was subsequently repaid on the Effective Date as discussed in Note 10 — Debt Obligations.
Flexsys is the world’s leading supplier of chemicals to the rubber processing and related industries and manufactures more than fifty different products consisting of vulcanizing agents and rubber chemicals. The acquisition was made to grow our portfolio of specialty chemical businesses. The results of operations for Flexsys are included in the Technical Specialties reportable segment from the acquisition date.
See Note 5 — Impairment of Long-Lived Assets and Restructuring Reserves — for restructuring charges recognized in accrued liabilities and other liabilities as part of the purchase price allocation above and charges utilized.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Divestitures
On November 24, 2009, we announced the sale of our customer list and technology to Taminco NV (“Taminco”) related to select products in our PERKACIT® ultra accelerators product line (“Thiurams Sale”) for $4, which resulted in a gain of $4 recorded in research, development and other operating expenses, net during 2009 in the Technical Specialties reportable segment. As part of the Thiurams Sale, we entered into an agreement with Taminco to produce the select products through March 31, 2010 (“Tolling Agreement”) for $4, of which $2 will be paid at the end of the Tolling Agreement in addition to reimbursement of certain costs. At the end of the Tolling Agreement, we will exit the Akzo Nobel facility in Cologne, Germany (“Cologne Facility”) where we currently operate as a guest. As a result of our exit from the Cologne Facility in 2010, certain restructuring charges will be incurred, which are discussed in further detail in Note 5 — Impairment of Long-Lived Assets and Restructuring Reserves.
On August 28, 2009, we entered into an agreement to sell the North America portion of our plastic products business to Orion Investment Group for $2 (“Plastic Products Sale”) effective August 1, 2009. Therefore, operating results and cash flows related to the North America plastic products business are not included in our Consolidated Statement of Operations or Consolidated Statement of Cash Flows after July 31, 2009. We recognized a loss of $5 in research, development and other operating expenses, net related to the Plastic Products Sale during 2009 in Unallocated and Other.
We have classified the following completed transactions as discontinued operations in the consolidated financial statements for all periods presented in accordance with U.S. GAAP. A summary of the net sales and income (loss) from discontinued operations follows:
                                 
    Successor     Predecessor  
    Twelve Months     Ten Months     Two Months     Twelve Months  
    Ended     Ended     Ended     Ended  
    December 31,     December 31,     February 29,     December 31,  
    2009     2008     2008     2007  
Integrated Nylon:
                               
Net sales
  $ 370     $ 1,462     $ 318     $ 1,892  
 
                       
Income (Loss) before income taxes
  $ (187 )   $ (648 )   $ 204     $ 52  
Income tax expense (benefit)
  (17 )     1             2  
 
                       
Income (Loss) from discontinued operations
  $ (170 )   $ (649 )   $ 204     $ 50  
 
                       
 
                               
Water Treatment Phosphonates Business:
                               
Net sales
  $     $     $     $ 43  
 
                       
Income before income taxes
  $     $     $     $ 34  
Income tax expense
                      15  
 
                       
Income from discontinued operations
  $     $     $     $ 19  
 
                       
 
                               
Resins, Additives, and Adhesives Business:
                               
Income tax expense (benefit)
  $ (1 )   $ (1 )   $     $ 5  
 
                       
Income (Loss) from discontinued operations
  $ 1     $ 1     $     $ (5 )
 
                       
On June 1, 2009, we sold substantially all the assets and certain liabilities, including environmental remediation and pension liabilities of active employees, of our Integrated Nylon business to S.K. Capital Partners II, L.P. (“Buyer”), a New York-based private equity firm. We realized a loss of $76 on this transaction in 2009, which was recorded in income (loss) from discontinued operations. In 2009, we wrote the carrying value of our fixed assets down from $48 to their fair value of zero, resulting in a $31 loss, net of tax, which was also recorded in income (loss) from discontinued operations. The fair value of these long-lived assets was developed using the sales agreement, which is a Level 2 fair value measurement under the fair value hierarchy.
In 2008, we performed an impairment test by estimating the fair value of the Integrated Nylon asset group by weighting estimated sales proceeds and discounted cash flows that the asset group could be expected to generate through the time of an assumed sale. This test resulted in an impairment charge of $461, which was recorded in income (loss) from discontinued operations in the Consolidated Statement of Operations for the ten months ended December 31, 2008.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
The carrying amounts of assets and liabilities for Integrated Nylon, which have been classified as current in the Consolidated Statement of Financial Position consisted of the following:
                 
    Successor  
    December 31,     December 31,  
    2009     2008  
 
 
Assets:
               
Trade receivables, net
  $     $ 75  
Miscellaneous receivables
    10       15  
Inventories
          336  
Prepaid expenses and other assets
          15  
Property, plant and equipment, net
          41  
Other assets
          8  
 
           
Assets of discontinued operations
  $ 10     $ 490  
 
           
 
               
Liabilities:
               
Accounts payable
  $ 29     $ 101  
Accrued liabilities
    21       54  
Environmental remediation liabilities
          9  
Other liabilities
          57  
Postretirement liabilities
          81  
 
           
Liabilities of discontinued operations
  $ 50     $ 302  
 
           
Prior to the sale of our Integrated Nylon business, Lyondell Chemical Company (“Lyondell”), a guest at the Integrated Nylon Alvin, Texas plant under various operating agreements which expire in December 2010, declared bankruptcy and provided to us notice of its intention to exit the facility and terminate its operating agreements early without consideration for the contractually agreed to early exit penalties. In response, we have withheld payment on certain trade payables to subsidiaries of Lyondell asserting these liabilities partially offset damages associated with the rejection of these contracts. In conjunction with the sale of the Integrated Nylon business, we have agreed to reimburse the Buyer for indirect residual costs incurred by them resulting from Lyondell’s early exit.
On May 31, 2007, we sold the assets and transferred certain liabilities of DEQUEST®, our water treatment phosphonates business (“Dequest”) to Thermphos Trading GmbH (“Thermphos”). Under the terms of the agreement, Thermphos purchased the assets and assumed certain of the liabilities of Dequest, resulting in a gain of $34 recorded in income (loss) from discontinued operations in the Consolidated Statement of Operations. The gain on sale of Dequest is subject to income tax in multiple jurisdictions, the allocation of which may be challenged by local authorities. We have provided taxes in excess of the U.S. Federal income rate to reflect this uncertainty. Dequest was a component of the former Performance Products segment prior to the classification as discontinued operations.
On January 31, 2003, we sold the resins, additives and adhesives businesses to UCB S.A. In 2007, a reserve of $5 was established in income (loss) from discontinued operations in the Consolidated Statement of Operations to provide for a potential liability for on-going tax audits of these businesses for the years 2000 through 2004. During 2009 and 2008, changes related to the tax audits for our 100% owned subsidiary, Solutia Deutschland GmbH, resulted in a $1 gain for both the twelve months and ten months ended December 31, 2009 and 2008, respectively, in income (loss) from discontinued operations in the Consolidated Statement of Operations.
5. Impairment of Long-Lived Assets and Restructuring Reserves
In an effort to maintain competitiveness across our businesses and the geographic areas in which we operate and to enhance the efficiency and cost effectiveness of our support operations, we periodically initiate certain restructuring activities which result in charges for costs associated with exit or disposal activities, severance and/or impairment of long-lived assets. A summary of these activities for 2009, 2008 and 2007 is as follows:
Cologne Facility Closure
As a result of the Thiurams Sale (see Note 4 — Acquisitions and Divestitures), we will cease manufacturing at the Cologne Facility at the end of the first quarter of 2010 with complete exit by the third quarter of 2010. As a result, based on current information, we expect to incur charges of approximately $10 throughout the closure process as an increase to cost of goods sold within our Technical Specialties reportable segment, categorized as follows: (i) $4 for employment reductions, (ii) $2 for future contractual payments related to indirect residual costs through November 2012 in accordance with the operating agreement and (iii) $4 for other costs including demolition. There can be no assurance as to what the ultimate charges will be. During the year ended December 31, 2009, less than $1 of restructuring costs were charged to cost of goods sold related to employment reductions.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
General Corporate
In the fourth quarter of 2008, we initiated a general corporate restructuring targeted to increase the efficiency and cost effectiveness of our support operations. Throughout 2009, this project has expanded in scope to include a reduction in operational personnel in order to more appropriately match our organization with current production levels. A summary of the employee reduction charges associated with this project during the year ended December 31, 2009 and cumulative charges through December 31, 2009 are as follows:
                                         
                    Technical     Unallocated        
    Saflex     CPFilms     Specialties     and Other     Total  
Year Ended December 31, 2009:
                                       
Cost of goods sold
  $ 3     $ 1     $ 1     $ 1     $ 6  
Selling, general and administrative expenses
    12       3       2       10       27  
Research, development and other operating expenses, net
    1                         1  
 
                             
Total
  $ 16     $ 4     $ 3     $ 11     $ 34  
 
                             
 
                                       
Cumulative through December 31, 2009:
                                       
Cost of goods sold
  $ 3     $ 1     $ 1     $ 1     $ 6  
Selling, general and administrative expenses
    12       3       2       13       30  
Research, development and other operating expenses, net
    1                         1  
 
                             
Total
  $ 16     $ 4     $ 3     $ 14     $ 37  
 
                             
In addition to the employee reduction charges recorded in selling, general and administrative expenses, we incurred $1 of charges in Unallocated and Other for future contractual payments related to the relocation of certain regional support operations from Singapore to Shanghai, China. We expect to incur an additional $2 in charges to be shared by all our segments to cover the cost of impacted headcount reductions.
Trenton Sheet Facility Closure
In an effort to balance our North America production with customer demand, in the fourth quarter of 2008, we announced the closure of our SAFLEX® plastic interlayer manufacturing line at our facility in Trenton, Michigan (“Trenton Facility”) in 2009. A summary of the charges associated with this project during the year ended December 31, 2009 and cumulative charges through December 31, 2009 as recorded in cost of goods sold are as follows:
                                 
    Impairment             Other        
    of Long-Lived     Employment     Restructuring        
    Assets     Reductions     Costs     Total  
Year Ended December 31, 2009:
                               
Charges taken
  $     $ 4     $ 1     $ 5  
 
                               
Cumulative through December 31, 2009:
                               
Charges taken
  $ 8     $ 6     $ 1     $ 15  
We do not expect to incur any additional restructuring charges for this project.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Ruabon Facility Closure
Due to overcapacity within the industry, a disadvantaged cost position and increasing pressure from Far Eastern producers, we ceased the manufacturing of certain rubber chemicals at our facility in Ruabon, Wales, United Kingdom (“Ruabon Facility”) in the third and fourth quarters of 2008 with a current expected final closure of the plant in 2014. A summary of the charges and changes in estimates associated with this project during the year ended December 31, 2009 and cumulative charges through December 31, 2009 as recorded in cost of goods sold are as follows:
                                 
    Future             Other        
    Contractual     Employment     Restructuring        
    Payments     Reductions     Costs     Total  
Year Ended December 31, 2009:
                               
Charges taken
  $     $ 2     $ 1     $ 3  
Changes in estimates (a)
    (5 )                 (5 )
 
                       
Total
  $ (5 )   $ 2     $ 1     $ (2 )
 
                       
 
                               
Cumulative through December 31, 2009:
                               
Charges taken
  $ 10     $ 9     $ 4     $ 23  
Changes in estimates (a)
    (5 )                 (5 )
 
                       
Total
  $ 5     $ 9     $ 4     $ 18  
 
                       
     
(a)  
We reduced the future contractual payment reserve by $5 due to a renegotiation of the lease and operating agreement with our third party operator. The new lease and operating agreement, which is effective from September 1, 2009 through December 31, 2013, reduced the services to be provided and increased certain fees allowing the contract to provide an economic benefit.
To complete the closure process, based on current information, we expect to incur an additional $5 in charges as an increase to cost of goods sold within our Technical Specialties reportable segment for other restructuring costs including demolition.
Plastic Products Manufacturing Relocation
To improve our cost position, we relocated the manufacturing operations of our plastic products business in 2008 from Ghent, Belgium to Oradea, Romania. During the ten months ended December 31, 2008, $2 of costs, categorized as other restructuring costs within Unallocated and Other, was charged to cost of goods sold for this restructuring event.
Flexsys Integration
In conjunction with the Flexsys Acquisition (see Note 4 — Acquisitions and Divestitures), we increased our restructuring reserve $10 as an adjustment to the purchase price allocation and assumed an additional $2 of existing restructuring reserves. The combined restructuring reserve is expected to cover (i) $10 for employment reductions and (ii) $2 for future contractual payments for administrative offices to be closed.
Other Rubber Chemical Impairment
Due to overcapacity within the industry, a disadvantaged cost position and increasing pressure from Far Eastern producers, the long-term profitability outlook of certain rubber chemicals product lines at our Ruabon Facility and our facility in Antwerp, Belgium (“Antwerp Facility”) declined significantly. As a result, in the fourth quarter of 2007 we recorded $25 as an increase to cost of goods sold within our Technical Specialties reportable segment for impairment of certain long-lived assets.
In 2008, we recorded maintenance capital expenditures on certain product lines that manufacture rubber chemicals at our Antwerp Facility. Because the carrying values of the related asset groups were fully impaired in 2007, we reviewed the expected future cash flows attributable to these product lines to ensure the 2008 capital expenditures were recoverable and concluded the carrying value of these capital additions should be reduced. As a result, during the ten months ended December 31, 2008, $3 of restructuring costs, categorized as impairment of fixed assets, was charged to cost of goods sold within our Technical Specialties reportable segment.
Chapter 11 Reorganization
To continue to improve efficiency as well as our cost position during our Chapter 11 Case, we enacted certain headcount reductions within our Saflex and Technical Specialties segments in 2007. As a result, $2 for employment reductions was charged to costs of goods sold during the twelve months ended December 31, 2007.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Restructuring Summary
The following table summarizes the above noted restructuring charges, amounts utilized to carry out those plans and amounts remaining at December 31, 2009:
                                         
    Future             Impairment of     Other        
    Contractual     Employment     Long-Lived     Restructuring        
    Payments     Reductions     Assets     Costs     Total  
Predecessor
                                       
Balance at January 1, 2008
  $ 3     $ 5     $     $     $ 8  
Amounts utilized
          (1 )                 (1 )
Currency fluctuations
          1                   1  
 
                             
Balance at February 29, 2008
    3       5                   8  
Successor
                                       
Charges taken
    9       12       11       5       37  
Amounts utilized
    (2 )     (4 )           (4 )     (10 )
Non-cash reductions
                (11 )     (1 )     (12 )
Change in estimates
    2       (2 )                  
Currency fluctuations
    (2 )     (1 )                 (3 )
 
                             
Balance at December 31, 2008
    10       10                   20  
Charges taken
    1       40             2       43  
Amounts utilized
    (4 )     (37 )           (2 )     (43 )
Changes in estimates
    (5 )                       (5 )
Currency fluctuations
          2                   2  
 
                             
Balance at December 31, 2009
  $ 2     $ 15     $     $     $ 17  
 
                             
We expect $13 of restructuring liabilities as of December 31, 2009 to be utilized within the next twelve months.
6. Goodwill and Other Intangible Assets
Goodwill
As a result of applying fresh-start accounting, the Successor recorded goodwill of $520 as of February 29, 2008. We do not have any goodwill that is deductible for tax purposes. During the ten months ended December 31, 2008, goodwill was reduced by $9 in accordance with ASC 852 to reflect our expectation that certain tax benefits, previously fully reserved, would be realized. Goodwill by reportable segment is as follows:
                                 
                    Technical        
    Saflex     CPFilms     Specialties     Total  
Predecessor
                               
Balance at December 31, 2007
  $ 55     $ 13     $ 81     $ 149  
Currency adjustment
                1       1  
Fresh-start eliminations
    (55 )     (13 )     (82 )     (150 )
Fresh-start additions
    205       159       156       520  
 
                       
Balance at February 29, 2008
    205       159       156       520  
Successor
                               
Tax Adjustment
                (9 )     (9 )
 
                       
Balance at December 31, 2008
  $ 205     $ 159     $ 147     $ 511  
 
                       
 
                               
Balance at December 31, 2009
  $ 205     $ 159     $ 147     $ 511  
 
                       
Identified Intangible Assets
Identified intangible assets are comprised of (i) amortizable customer relationships, unpatented technology, contract-based intangible assets, trade names and patents and (ii) indefinite-lived trademarks not subject to amortization. The value assigned to the identified intangible assets upon the adoption of fresh-start accounting represents our best estimates of fair value based on internal and external valuations. These intangible assets are summarized in aggregate as follows:
                                                         
    Successor  
    December 31, 2009     December 31, 2008  
    Estimated                           Estimated                    
    Useful   Gross             Net     Useful   Gross             Net  
    Life in   Carrying     Accumulated     Carrying     Life in   Carrying     Accumulated     Carrying  
    Years   Value     Amortization     Value     Years   Value     Amortization     Value  
 
                                                       
Amortizable intangible assets:
                                                       
Customer relationships
  23 to 27   $ 491     $ (34 )   $ 457     23 to 27   $ 486     $ (15 )   $ 471  
Technology
  5 to 26     202       (19 )     183     5 to 26     199       (9 )     190  
Trade names
  25     13       (1 )     12     25     13       (-- )     13  
Patents
  13     5       (1 )     4     13     4       (-- )     4  
Indefinite-lived intangible assets:
                                                       
Trademarks
        147             147           145             145  
 
                                           
Total Identified Intangible Assets
      $ 858     $ (55 )   $ 803         $ 847     $ (24 )   $ 823  
 
                                           

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
During the twelve months and ten months ended December 31, 2009 and 2008, we recognized $30 and $25 of amortization expense, respectively. Amortization expense is allocated to cost of goods sold and selling, general and administrative expenses in the Consolidated Statement of Operations as follows:
                 
    Successor  
    Twelve Months     Ten Months  
    Ended     Ended  
    December 31,     December 31,  
    2009     2008  
 
               
Cost of goods sold
  $ 10     $ 9  
Selling, general and administrative expenses
  $ 20     $ 16  
Based on current information, we expect amortization expense for intangible assets to be approximately $30 annually from 2010 through 2014.
In the fourth quarter of each year we test for impairment the carrying value of goodwill and indefinite-lived intangible assets. There were no impairments to the carrying amount of goodwill or trademarks during 2009. As a result of this test during the ten months ended December 31, 2008, we recorded an impairment charge of $3 within our CPFilms reportable segment to reflect a write down of trademarks. The charge was recorded in selling, general, and administrative expenses in the Consolidated Statement of Operations and was determined after comparing the fair value, estimated by discounting future cash flows attributable to this asset, to its carrying value. The impairment charge was precipitated by an expectation of a lower percentage of projected cash flows attributable to trademark branded window film products, which became apparent during the fourth quarter of 2008 in conjunction with the completion of our annual budget and long range plan process.
7. Investments in Affiliates
On May 1, 2007 as further described in Note 4 — Acquisitions and Divestitures, we acquired Akzo Nobel’s interest in Flexsys resulting in us consolidating Flexsys as a 100% owned subsidiary. We applied the equity method of accounting for Flexsys prior to May 1, 2007. Summarized combined financial information for 100 percent of the Flexsys joint venture prior to May 1, 2007 is as follows:
         
    Predecessor  
    Twelve Months  
    Ended  
    December 31,  
    2007  
Results of Operations:
       
Net Sales
  $ 207  
Gross Profit
  $ 50  
Operating income
  $ 34  
Net income
  $ 25  
8. Detail of Certain Balance Sheet Accounts
Components of inventories were as follows:
                 
    Successor  
    December 31,     December 31,  
Inventories   2009     2008  
 
               
Finished goods
  $ 138     $ 195  
Goods in process
    47       59  
Raw materials and supplies
    71       87  
 
           
Inventories, at FIFO cost
    256       341  
Excess of LIFO over FIFO cost
    1        
 
           
Total Inventories
  $ 257     $ 341  
 
           

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
In connection with the adoption of fresh-start accounting, inventories were recorded at the selling price less cost to sell resulting in the elimination of the LIFO reserve and a step-up in basis of $67 at the Effective Date. The $67 step-up in basis was charged to cost of goods sold in the Successor Consolidated Statement of Operations during the ten months ended December 31, 2008.
Components of property, plant and equipment were as follows:
                 
    Successor  
    December 31,     December 31,  
Property, Plant and Equipment   2009     2008  
 
               
Land
  $ 33     $ 34  
Leasehold improvements
    10       9  
Buildings
    211       203  
Machinery and equipment
    758       727  
Construction in progress
    35       35  
 
           
Total property, plant and equipment
    1,047       1,008  
Less accumulated depreciation
    (128 )     (56 )
 
           
Total
  $ 919     $ 952  
 
           
Components of accrued liabilities were as follows:
                 
    Successor  
    December 31,     December 31,  
Accrued Liabilities   2009     2008  
 
               
Wages and benefits
  $ 24     $ 57  
Foreign currency and interest rate hedge agreements
    7       36  
Restructuring reserves
    13       19  
Environmental remediation liabilities
    31       30  
Accrued income taxes payable
    19       15  
Accrued selling expenses
    20       16  
Other
    92       86  
 
           
Total Accrued Liabilities
  $ 206     $ 259  
 
           
9. Income Taxes
The components of income (loss) from continuing operations before income taxes were as follows:
                                 
    Successor     Predecessor  
    Twelve Months     Ten Months     Two Months     Twelve Months  
    Ended     Ended     Ended     Ended  
    December 31,     December 31,     February 29,     December 31,  
    2009     2008     2008     2007  
United States
  $ (53 )   $ (40 )   $ 1,094     $ (307 )
Outside United States
    127       38       370       55  
 
                       
Total
  $ 74     $ (2 )   $ 1,464     $ (252 )
 
                       
The components of income tax expense recorded in continuing operations were as follows:
                                 
    Successor     Predecessor  
    Twelve Months     Ten Months     Two Months     Twelve Months  
    Ended     Ended     Ended     Ended  
    December 31,     December 31,     February 29,     December 31,  
    2009     2008     2008     2007  
Current:
                               
U.S. federal
  $     $     $     $  
U.S. state
                       
Outside United States
    26       21       15       32  
 
                       
 
    26       21       15       32  
Deferred:
                               
U.S. federal
          (1 )           (10 )
U.S. state
                       
Outside United States
    (12 )     (7 )     199       (5 )
 
                       
 
    (12 )     (8 )     199       (15 )
 
                       
Total
  $ 14     $ 13     $ 214     $ 17  
 
                       

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to income (loss) from continuing operations before income taxes as a result of the following:
                                 
    Successor     Predecessor  
    Twelve Months     Ten Months     Two Months     Twelve Months  
    Ended     Ended     Ended     Ended  
    December 31,     December 31,     February 29,     December 31,  
Dollars in millions   2009     2008     2008     2007  
Income Tax at federal statutory rate
  $ 26     $ (1 )   $ 513     $ (88 )
Increase (reduction) in income taxes due to:
                               
U.S. state income taxes
    (3 )     (6 )     7       (9 )
Taxes related to foreign earnings
    (23 )     14       51       8  
Valuation allowances
    23       8       (259 )     82  
Income from equity affiliates
                      (3 )
Surrendered losses from equity affiliate (a)
                (4 )     (4 )
Reorganization items
                (107 )     17  
Tax contingency adjustment
    (8 )     1       10       10  
Other
    (1 )     (3 )     3       4  
 
                       
Income tax expense
  $ 14     $ 13     $ 214     $ 17  
 
                       
     
(a)  
During the Predecessor periods ended February 29, 2008 and December 31, 2007, a non-consolidated equity affiliate surrendered a prior year loss that was used to offset a foreign subsidiary’s taxable income in the United Kingdom.
We have been granted tax holidays in Malaysia and China which first benefited the year ended December 31, 2006. The Malaysia holidays expire in 2012 and 2013, and the China holidays phase out between 2009 and 2012. The aggregate benefits on income tax expense were $11 in the twelve months ended December 31, 2009, $6 in the ten months ended December 31, 2008, $1 in the two months ended February 29, 2008, and $5 in the twelve months ended December 31, 2007.
Deferred income tax balances were related to:
                 
    Successor  
    December 31,     December 31,  
    2009     2008  
 
 
Postretirement benefits
  $ 138     $ 163  
Environmental liabilities
    111       115  
Inventory
          5  
Insurance reserves
    14       16  
Miscellaneous accruals
    13       16  
Equity affiliates
    24       4  
Net operating losses
    559       488  
Tax credit carryforward
    131       55  
Accrued allowed claims
          14  
Other
    23       60  
 
           
Total Deferred Tax Assets
    1,013       936  
Less: Valuation allowances
    (753 )     (572 )
 
           
Deferred Tax Assets Less Valuation Allowances
    260       364  
 
           
 
               
Intangible Assets
    (284 )     (287 )
Property
    (68 )     (149 )
Undistributed earnings
    (46 )     (90 )
Inventory
    (3 )      
Other
    (9 )     (9 )
 
           
Total Deferred Tax Liabilities
    (410 )     (535 )
 
           
Net Deferred Tax Liabilities
  $ (150 )   $ (171 )
 
           

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
Deferred tax assets are reduced by valuation allowances resulting in our best estimate of the amount of deferred tax assets that are more likely than not to be realized. The valuation allowances are affected by items not included in our components of income tax expense from continuing operations, including certain changes in estimated foreign tax credit carryforwards available and in unrecognized tax benefits, the tax effects of undistributed earnings of foreign subsidiaries not indefinitely reinvested, deferred tax items recorded to accumulated other comprehensive loss and the completion of income tax returns.
For each tax-paying component and within a particular tax jurisdiction, (i) all current deferred tax liabilities and assets are offset and presented as a single amount and (ii) all noncurrent deferred tax liabilities and assets are offset and presented as a single amount. This approach results in the following classification on the Consolidated Statement of Financial Position as of December 31, 2009 and 2008:
                 
    Successor  
    December 31,     December 31,  
    2009     2008  
Deferred Tax Assets:
               
Prepaid expenses and other assets
  $ 8     $ 21  
Other assets
    21       11  
 
           
Total
  $ 29     $ 32  
 
           
 
               
Deferred Tax Liabilities:
               
Accrued liabilities
  $     $ 1  
Deferred tax liabilities
    179       202  
 
           
Total
  $ 179     $ 203  
 
           
At December 31, 2009, research and development tax credit carryforwards available to reduce possible future U.S. income taxes amounted to approximately $5, all of which will expire in 2019 through 2022. At December 31, 2009, foreign tax credit carryforwards available upon election to reduce possible future U.S. income taxes were estimated to be approximately $125, which will expire in 2018 and 2019. Income taxes and remittance taxes have not been recorded on $96 of undistributed earnings of subsidiaries because we intend to reinvest those earnings indefinitely. It is not practicable to estimate the tax effect of remitting these earnings to the U.S.
Net Operating Loss and Valuation Allowance
At December 31, 2009, various federal, state and foreign net operating loss carryforwards were available to offset future taxable income. These net operating losses expire from 2010 through 2027 or have an indefinite carryforward period. A full valuation allowance has been provided against the U.S. deferred tax assets. The valuation allowance will be retained until there is sufficient positive evidence to conclude that it is more likely than not that the deferred tax assets will be realized.
As a result of the issuance of our common stock upon emergence from bankruptcy, we realized a change of ownership for purposes of Section 382 of the Internal Revenue Code. We do not currently expect this change to significantly limit our ability to utilize our U.S. net operating loss carryforward, which we estimated to be approximately $1,600 at December 31, 2009, of which approximately $600 was available without limitation. As discussed in Note 16 — Capital Stock, during the third quarter of 2009, our Board of Directors approved a net operating loss shareholder rights plan (“Rights Plan”) which is intended to reduce the likelihood of an additional ownership change within the meaning of Section 382 of the Internal Revenue Code and thereby preserve our ability to utilize our U.S. net operating loss carryforward.
Unrecognized Tax Benefits
In July 2006, the FASB issued guidance, now referenced as ASC 740, which creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. As a result of the adoption of this guidance on January 1, 2007, we increased our accumulated deficit by $3 as a cumulative effect adjustment in the Consolidated Statement of Shareholders’ Equity (Deficit).
The total amount of unrecognized tax benefits, inclusive of interest and penalties, at December 31, 2009 and 2008 was $155 and $157, respectively. The decrease in this amount is mainly the result of the closure of tax audits and statute of limitation expirations offset by tax positions with respect to events in the current year and currency exchange fluctuations. Included in the balance at December 31, 2009 and 2008 were $54 and $63, respectively, of unrecognized tax benefits that, if recognized, would affect the effective tax rate.
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2009, we accrued $5 for interest and $6 for penalties. As of December 31, 2008 the amount accrued was $3 for interest and $6 for penalties.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
A reconciliation of the beginning and ending amount of unrecognized tax benefits (exclusive of interest and penalties) is as follows:
         
    Total  
Predecessor
       
Balance at January 1, 2007
  $ 101  
Gross increases — tax positions in prior periods
    16  
Gross increases — current period tax positions
    24  
Settlements
    (1 )
Lapse of statute of limitations
    (4 )
 
     
Balance at December 31, 2007
    136  
Gross increases — tax positions in prior periods
    3  
Gross increases — current period tax positions
    11  
 
     
Balance at February 29, 2008
    150  
Successor
       
Gross increases — tax positions in prior periods
    2  
Gross decreases — tax positions in prior periods
    (11 )
Gross increases — current period tax positions
    9  
Settlements
    (1 )
Lapse of statute of limitations
    (1 )
 
     
Balance at December 31, 2008
    148  
Gross increases — tax positions in prior periods
    5  
Gross decreases — tax positions in prior periods
    (12 )
Gross increases — current period tax positions
    12  
Lapse of statute of limitations
    (9 )
 
     
Balance at December 31, 2009
  $ 144  
 
     
We file income tax returns in the United States and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. It is reasonably possible that within the next twelve months as a result of the resolution of Federal, state and foreign examinations and appeals, and the expiration of various statutes of limitation that the unrecognized tax benefits that would affect the effective tax rate will decrease by a range of $2 to $16 and the unrecognized tax benefits that would not affect the effective tax rate will decrease by a range of $0 to $7.
10. Debt Obligations
On the Effective Date, we recapitalized our debt concurrent with our emergence from bankruptcy by entering into certain financing agreements to borrow up to $2.05 billion from a syndicate of lenders (the “Financing Agreements”). The Financing Agreements consisted of (i) a $450 senior secured asset-based revolving credit facility (“Revolver”), which we voluntarily reduced to $350 in 2009, (ii) a $1.2 billion senior secured term loan facility (“Term Loan”) and (iii) a $400 senior unsecured bridge facility (“Bridge”), which was repaid in August 2008 with proceeds from the stock offerings discussed in Note 16 — Capital Stock. Proceeds from the Financing Agreements and existing cash were used to (i) repay the debtor-in-possession (“DIP”) credit facility, (ii) retire Solutia Services International S.C.A./Comm. V.A.’s (“SSI”) Facility Agreement due 2011, (iii) retire the Flexsys term loan and revolving credit facility due 2012, (iv) pay certain secured and administrative claims, and (v) provide additional liquidity for operations.
During the second quarter of 2009, $74 of senior unsecured term debt, due 2011, at a price of 95 percent of its original principal amount was issued by our 100% owned German subsidiary, Flexsys Verkauf GmbH (the “Senior Term Loan”). Net proceeds, after incorporating the original issue discount and debt issuance fees, of $66, were used to pay down our Revolver. On June 25, 2009, we repaid the Senior Term Loan utilizing a portion of the $119 of proceeds from our 2009 stock offering discussed in Note 16 — Capital Stock.
In the fourth quarter of 2009, we issued $400 of senior unsecured notes, due 2017 (“2017 Notes”). A portion of the $391 net proceeds received from the 2017 Notes were used to pay down $300 of principal on the Term Loan. As a result of the early payment, we incurred a $30 charge to interest expense to write-off deferred financing fees related to the Term Loan. In conjunction with the issuance of the 2017 Notes, we amended our Revolver and Term Loan to provide greater operational and strategic flexibility in addition to increasing our liquidity and leverage covenant cushion.

 

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SOLUTIA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
We had short-term borrowings of $16 and $25 at December 31, 2009 and 2008, respectively, comprised of other lines of credit.
Our long-term debt consisted of the following as of December 31, 2009 and 2008:
                 
    Successor  
    December 31,     December 31,  
    2009     2008  
 
 
Term Loan, due 2014
  $ 876     $ 1,188  
Revolver, due 2013
          183  
2017 Notes
    400        
 
           
Total principal amount
    1,276       1,371  
Less current portion of long-term debt
    (12 )     (12 )
 
           
Total
  $ 1,264     $ 1,359  
 
           
Maximum availability under the Revolver is limited to the lesser of $350 or the amount of our borrowing base, as defined, but generally calculated as a percentage of allowable inventory and trade receivables. In addition to outstanding borrowings, availability is further reduced by outstanding letters of credit. As of December 31, 2009, availability under the Revolver was $120. The weighted average interest rate on our total debt outstanding at both December 31, 2009 and 2008 was 7.7 percent. Our weighted average interest rate on short-term debt outstanding at December 31, 2009, was 2.