UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-K
________________________________________
x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
or
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 001-12658
ALBEMARLE CORPORATION
(Exact name of registrant as specified in its charter)
VIRGINIA | 54-1692118 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Baton Rouge, Louisiana 70801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 225-388-8011
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
COMMON STOCK, $.01 Par Value | NEW YORK STOCK EXCHANGE | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) 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. x
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. (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $6.2 billion based on the reported last sale price of common stock on June 30, 2015, the last business day of the registrant’s most recently completed second quarter.
Number of shares of common stock outstanding as of February 17, 2016: 112,250,676
Documents Incorporated by Reference
Portions of Albemarle Corporation’s definitive Proxy Statement for its 2016 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Parts II and III of this Form 10-K.
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Index to Form 10-K
Year Ended December 31, 2015
Page | ||
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PART I
Item 1. | Business. |
Albemarle Corporation was incorporated in Virginia in 1993. Our principal executive offices are located at 451 Florida Street, Baton Rouge, Louisiana 70801. Unless the context otherwise indicates, the terms “Albemarle,” “we,” “us,” “our” or “the Company” mean Albemarle Corporation and our consolidated subsidiaries.
On January 12, 2015 (the “Acquisition Closing Date”), we completed the acquisition (the “Merger”) of Rockwood Holdings, Inc. (“Rockwood”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) for a purchase price of approximately $5.7 billion. As a result, Rockwood became a wholly-owned subsidiary of Albemarle. For additional information about the Merger, see “Recent Acquisitions, Joint Ventures and Divestitures” beginning on page 10, and also Note 2, “Acquisitions,” to our consolidated financial statements included in Part II, Item 8 of this report.
We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that meets customer needs across a diverse range of end markets. The end markets we serve include petroleum refining, consumer electronics, energy storage, construction, automotive, steel and aerospace, lubricants, pharmaceuticals, crop protection, household appliances, heating, ventilation, aluminum finishing, food safety and custom chemistry services. We believe that our commercial and geographic diversity, technical expertise, innovative capability, flexible, low-cost global manufacturing base, experienced management team and strategic focus on our core base technologies will enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.
We and our joint ventures currently operate 51 production and research and development (“R&D”) facilities, as well as a number of administrative and sales offices, in North and South America, Europe, the Middle East, Asia, Africa and Australia. As of December 31, 2015, we served approximately 30,000 customers in approximately 100 countries. For information regarding our unconsolidated joint ventures see Note 10, “Investments,” to our consolidated financial statements included in Part II, Item 8 of this report.
Business Segments
During 2015, our operations were managed and reported under three reportable segments: Performance Chemicals, Refining Solutions and Chemetall® Surface Treatment. Financial results and discussion about our segments included in this Annual Report on Form 10-K are organized according to these categories except where noted.
For financial information regarding our reportable segments, including revenues generated for each of the last three fiscal years from each of the product categories included in our reportable segments, and geographic area information, see Note 25, “Segment and Geographic Area Information,” to our consolidated financial statements included in Part II, Item 8 of this report.
On October 26, 2015, we announced that effective January 1, 2016, Performance Chemicals will be split into two separate reportable segments: (1) Bromine Specialties, and (2) Lithium and Advanced Materials, which will include Lithium, Performance Catalyst Solutions and Curatives. Each unit will have a dedicated team of sales, product management, research & development, process technology, manufacturing, sourcing, sales and operations planning and customer service groups and will have full accountability for improving execution through greater asset and market focus, agility and responsiveness. We expect this change to provide further clarity into the performance of each business.
Performance Chemicals Segment
As of December 31, 2015, our Performance Chemicals segment consisted of three product categories: Lithium, Performance Catalyst Solutions, and Bromine.
Lithium. Our Lithium business develops advanced materials for a wide range of industries and end markets. We believe that our Lithium business is a low-cost producer of the most diverse product portfolio of lithium derivatives in the industry.
We develop and manufacture a broad range of basic lithium compounds, including lithium carbonate, lithium hydroxide, lithium chloride, and value-added lithium specialties and reagents, including butyllithium and lithium aluminum hydride. Lithium is a key component in products and processes used in a variety of applications and industries, which include lithium batteries used in consumer electronics and automobiles, high performance greases, thermoplastic elastomers for car tires, rubber soles and plastic bottles, catalysts for chemical reactions, organic synthesis processes in the areas of steroid chemistry and vitamins, various life science applications, as well as intermediates in the pharmaceutical industry, among other applications. We also develop and manufacture cesium products for the chemical and pharmaceutical industries, and zirconium, barium and titanium products for various pyrotechnical applications, including airbag igniters.
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In addition to developing and supplying lithium compounds, we provide technical services, including the handling and use of reactive lithium products. We also offer our customers recycling services for lithium containing by-products resulting from synthesis with organolithium products, lithium metal and other reagents. We plan to continue to focus on the development of new products and applications.
Lithium—Customers
Our most significant customers include Panasonic Corporation, Syngenta AG, Umicore S.A., Samsung SDI Co. Ltd. and Royal DSM N.V.
Lithium—Competition
The global lithium market consists of producers located in the Americas, Asia-Pacific and, to a lesser extent, Africa. We believe that we are a leading global provider of lithium compounds. Major competitors include FMC Corporation, Sociedad Quimica y Minera de Chile S.A., SichuanTianqi Lithium, and Jiangxi Ganfeng Lithium. Competition in this part of the business is based on product quality, reliability of supply and customer service. In the metal-based specialty chemicals business, key competitors include Cabot Corporation and Sigma-Aldrich Corporation. Competition in this part of the business is based on product quality and product diversity.
Lithium—Raw Materials and Significant Supply Contracts
We obtain lithium through solar evaporation of our ponds at the Salar de Atacama, in Chile, and in Silver Peak, Nevada. After we obtain the lithium brine from the Salar de Atacama, we process it into lithium carbonate and lithium chloride at a plant in nearby La Negra, Chile. The lithium brine from our Silver Peak site is processed into lithium carbonate at our plant in Silver Peak. Subsequently, in other locations in the United States (“U.S.”), Germany, France and Taiwan, we further process the materials into various derivatives, depending on the markets we serve.
Our mineral rights with respect to the Salar de Atacama in Chile consist exclusively of our right to access lithium brine pursuant to a long-term contract with the Chilean government, originally entered into in January 1975 by one of our predecessors and subsequently amended and restated. Our contract with the Chilean government will remain in effect until the date on which we have produced and sold 200,000 metric tons of lithium in any of its forms from the Salar de Atacama. As of December 31, 2015, the remaining amount of lithium we were permitted to sell under the contract equaled approximately 115,000 metric tons of total lithium. In February 2016 we announced that we were granted approval by the Environmental Assessment Commission of the Antofagasta Region to increase our currently authorized lithium brine removal rate in the Salar de Atacama. The size of the area at the Salar de Atacama covered by our claims is approximately 16,700 hectares. We currently own the land on which we operate our facility at the Salar de Atacama and our processing facility in La Negra. However, the ownership of the land at the Salar de Atacama will revert to the Chilean government once we have sold all amounts of lithium remaining under our contract with the Chilean government (the ownership of the land and fixed assets in La Negra will remain unchanged). In February 2016, we also announced that we entered into a Memorandum of Understanding with the Chilean government that provides sufficient lithium to support the production of 70,000 metric tons annually of technical and battery grade lithium carbonate and 6,000 metric tons annually of lithium chloride in La Negra, over a 27-year period, beginning January 1, 2017.
Our mineral rights in Silver Peak, Nevada consist exclusively of our right to access lithium brine pursuant to a settlement agreement with the U.S. government, originally entered into in June 1991 by one of our predecessors. Pursuant to this agreement, we have rights to all of the lithium that we can remove economically. We or our predecessors have been operating at the Silver Peak site since 1966. Our Silver Peak site covers a surface of approximately 15,301 acres, 10,826 acres of which we own through a subsidiary. The remaining acres are owned by the U.S. government from whom we lease the land pursuant to a lease agreement which is renewed annually. Based on our 2015 production levels, we believe that the amount of lithium brine we can economically obtain from our Silver Peak, Nevada site pursuant to our contract with the U.S. government could support the current levels of lithium carbonate production for approximately 20 years. Assuming certain operating conditions are satisfied, our annual lithium carbonate production capacity is estimated to be approximately 6,000 metric tons at our Silver Peak facility. However, no assurance can be given that the indicated levels of production of lithium carbonate at either Silver Peak or La Negra will be realized.
We also own a 49% interest in Windfield Holdings Pty Ltd, which directly owns 100% of the equity of Talison Lithium Pty Ltd, a company incorporated in Australia (“Talison”). Talison, through its wholly-owned subsidiaries, owns and operates a lithium mine in Greenbushes, Western Australia and mines lithium ore, which is then milled and processed to separate lithium concentrate from the rest of the ore. Talison currently sells the lithium concentrate to its shareholders. Talison has a leading position in two categories of lithium concentrates: (i) technical-grade lithium concentrates which have low iron content for use in the manufacture of glass, ceramics and heat-proof cookware; and (ii) a high-yielding chemical-grade lithium concentrate,
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which is used to produce lithium chemicals which form the basis for manufacture of lithium-ion batteries for laptop computers, mobile phones, electric bicycles and electric vehicles. Assuming certain operating conditions are satisfied, the annual lithium concentrate production capacity at the Talison facility is estimated to be approximately 575,000 metric tons. However, no assurance can be given that the indicated levels of production of lithium concentrate at Talison will be realized.
Performance Catalyst Solutions (“PCS”). We have four product lines in our PCS division: polymer catalysts, curatives, organometallics and electronic materials. We manufacture organometallic co-catalysts (e.g., aluminum, magnesium and zinc alkyls) as well as metallocene components and co-catalysts (e.g., methylaluminumoxane, organoborons, metallocene compounds, and finished polymerization catalysts comprising these products). We also offer finished single-site catalysts with or without our proprietary ActivCat® activation technology and a line of proprietary Ziegler-Natta catalysts under the Advantage™ brand. Our co-catalysts and finished catalysts are used in our customers’ production of polyolefin polymers. Such polymers are commodity (i.e., Ziegler-Natta polymerization technology-based) and specialty (i.e., Single Site polymerization technology-based) plastics serving a wide variety of end markets including packaging, non-packaging, films and injection molding. Some of our organometallic products are also used in the manufacture of alpha-olefins (i.e., hexene, octene, decene). In electronic materials, we manufacture and sell high purity metal organic products into electronic applications such as the production of light-emitting diodes (“LEDs”) for displays and general lighting, as well as other products used in the production of solar cells. Our curatives include a range of curing agents used in polyurethanes, epoxies and other engineered resins.
PCS—Customers
Our PCS business customers include multinational corporations such as ExxonMobil Corporation, Chevron Corporation, Total Petrochemicals, Saudi Basic Industries Corporation and Ineos Group Holdings S.A. There are thousands of polyolefin and elastomer units worldwide which require a constant supply of co-catalysts and finished catalysts.
PCS—Competition
Our PCS business serves the global market including the Americas, Europe, Asia and the Middle East. Our major competitors in the PCS market include AkzoNobel, Chemtura Corporation and W.R. Grace & Co. in the polyolefin catalyts and co-catalysts areas. Lonza is our main competitor in the curatives market.
PCS—Raw Materials and Significant Supply Contracts
The major raw materials we use in our PCS operations include aluminum, ethylene, alpha-olefins, isobutylene and toluene, most of which are readily available from numerous independent suppliers and are purchased or provided under contracts at prices we believe are competitive. The cost of raw materials is generally based on market prices, although we may use contracts with price caps or other tools, as appropriate, to mitigate price volatility. These raw materials may nevertheless be subject to significant volatility despite our mitigating efforts. Our profitability may be affected if we are unable to recover significant raw material costs from our customers.
Bromine. Our bromine and bromine-based business includes products used in fire safety solutions and other specialty chemicals applications. Our fire safety technology enables the use of plastics in high performance, high heat applications by enhancing the flame resistant properties of these materials. Some of the end market products that benefit from our fire safety technology include plastic enclosures for consumer electronics, printed circuit boards, wire and cable, electrical connectors, textiles and foam insulation. Our bromine based business also includes specialty chemicals products such as elemental bromine, alkyl bromides, inorganic bromides, brominated powdered activated carbon and a number of bromine fine chemicals. Our products are used in chemical synthesis, oil and gas well drilling and completion fluids, mercury control, water purification, beef and poultry processing and various other industrial applications. Other specialty chemicals that we produce include tertiary amines for surfactants, biocides, and disinfectants and sanitizers.
Bromine—Customers
Our bromine business offers more than 40 products to a variety of end markets. We sell our products mostly to chemical manufacturers and processors, such as polymer resin suppliers, drilling and oil service companies, beef and poultry processors, water treatment and photographic companies, energy producers and other specialty chemical companies.
Sales of bromine and brominated derivatives in Asia are expected to grow long-term due to the underlying growth in consumer demand and the shift of the production of consumer electronics from the U.S. and Europe to Asia. In response to this development, we have established a sales and marketing network in China, Japan, Korea and Singapore with products sourced from the U.S., Europe, China and the Middle East.
A number of customers of our bromine business operate in cyclical industries, including the consumer electronics and oil field industries. As a result, demand from our customers in such industries is also cyclical.
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Bromine—Competition
Our bromine business serves the following geographic markets: the Americas, Asia, Europe and the Middle East, each of which is highly competitive. Product performance and quality, price and contract terms are the primary factors in determining which qualified supplier is awarded a contract. Research and development, product and process improvements, specialized customer services, the ability to attract and retain skilled personnel and maintenance of a good safety record have also been important factors to compete effectively in the marketplace. Our most significant competitors are Chemtura Corporation and Israel Chemicals Ltd.
Bromine—Raw Materials and Significant Supply Contracts
The bromine we use is sourced from two locations: Arkansas and the Dead Sea. Our bromine production operations in Arkansas are supported by an active brine rights leasing program. We estimate that, at current production levels, we will be able to produce bromine in Arkansas for more than 50 years. In addition, through our 50% interest in Jordan Bromine Company Limited (“JBC”), a consolidated joint venture with operations in Safi, Jordan, we source bromine from the Dead Sea, which is believed to have indefinite quantities of brine. In addition, we have a joint venture with Weifang Sinobrom Import and Export Company, Ltd. (“Sinobrom”) in China that allows us the option to source bromine directly from China’s Shandong Province brine fields.
Refining Solutions Segment
Our two main product lines in this segment are (i) Clean Fuels Technologies, which is primarily composed of hydroprocessing catalysts (“HPC”), and (ii) Heavy Oil Upgrading (“HOU”), which is primarily composed of fluidized catalytic cracking (“FCC”) catalysts and additives. HPC products are widely applied throughout the refining industry. Their application enables the upgrading of oil fractions to clean fuels and other usable oil feedstocks and products by removing sulfur, nitrogen and other impurities from the feedstock. In addition, they improve product properties by adding hydrogen and in some cases improve the performance of downstream catalysts and processes. We continuously seek to add more value to refinery operations by offering HPC products that meet our customers’ requirements for profitability and performance in the very demanding refining market. FCC catalysts assist in the high yield cracking of less desired refinery petroleum streams into derivative, higher-value products such as transportation fuels and petrochemical feedstocks like propylene. Our FCC additives are used to reduce emissions of sulfur dioxide and nitrogen oxide in FCC units and to increase liquefied petroleum gas olefins yield, such as propylene, and to boost octane in gasoline. Albemarle offers unique refinery catalysts to crack and treat the lightest to the heaviest feedstocks while meeting refinery yield and product needs. We offer a wide range of HPC products and approximately 60 different FCC catalysts and additives products to our customers.
Customers
Our Refining Solutions segment customers include multinational corporations such as ExxonMobil Corporation, Chevron Corporation, TOTAL S.A., Saudi Aramco and its joint ventures, and INEOS Group Holdings S.A.; independent petroleum refining companies such as Valero Energy Corporation, SK Energy Holdings, Reliance Industries and Marathon Petroleum; national petroleum refining companies such as Petróleo Brasileiro S.A., Petróleos Mexicanos, PetroVietnam, Kuwait National Petroleum Company, Abu Dhabi National Oil Company and Indian Oil Corp.
In 2015 the total number of refineries world wide was reduced from 643 to 634 and we see this trend continuing with smaller refineries shutting down and being replaced by mega refineries, with growth concentrated in the Middle East. Oil refining has once again increased after minor declines in the last two years.
We estimate that there are currently approximately 500 FCC units being operated globally, each of which requires a constant supply of FCC catalysts. In addition, we estimate that there are approximately 3,000 HPC units being operated globally, or a capacity of approximately 44 million barrels per day, each of which typically requires replacement HPC catalysts once every one to four years.
Competition
Our Refining Solutions segment serves the global market including the Americas, Asia, Europe and the Middle East, each of which is highly competitive. Product performance and quality, price and contract terms are the primary factors in determining which qualified supplier is awarded a contract.
Research and development, product and process improvements, specialized customer services, the ability to attract and retain skilled personnel and the maintenance of a good safety record have also been important factors to compete effectively in the Catalysts marketplace. Through our research and development programs, we strive to differentiate our business by developing value-added products and products based on proprietary technologies.
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Our major competitors in the HPC catalysts market include Criterion Catalysts and Technologies, Advanced Refining Technologies and Haldor Topsoe. Our major competitors in the FCC catalysts market include W.R. Grace & Co., BASF Corporation and China Petrochemical Corporation (Sinopec).
Raw Materials and Significant Supply Contracts
The major raw materials we use in our Refining Solutions operations include sodium silicate, sodium aluminate, kaolin, rare earths and metals such as molybdenum, nickel and cobalt, most of which are readily available from numerous independent suppliers and are purchased or provided under contracts at prices we believe are competitive. The cost of raw materials is generally based on market prices, although we may use contracts with price caps or other tools, as appropriate, to mitigate price volatility. These raw materials may nevertheless be subject to significant volatility despite our mitigating efforts. Our profitability may be affected if we are unable to recover significant raw material costs from our customers.
Chemetall Surface Treatment Segment
Our Chemetall Surface Treatment segment operates under the Chemetall® brand name and is a leading global supplier of applied surface treatments and services for metal, plastic and glass substrates in a wide range of industries and end markets. Chemetall Surface Treatment’s products are used for a variety of applications and serve the automotive, aerospace, aluminum finishing, coil, cold forming, glass and general industrial markets, including metal fabrication. We also provide process control and on-site support at our customers’ facilities with local representation worldwide. Our systems are designed to ensure that the final requirements of our customers’ treated products are met in terms of proper surface treatment prior to painting, corrosion protection and preservation of mechanical properties.
Chemetall Surface Treatment competes in markets characterized by proprietary manufacturing technologies and know-how, demanding product-handling requirements, rigorous product quality and performance specifications, all accompanied by longstanding customer relationships. In order to remain competitive, we are focused on developing innovative products, improving process technologies, expanding our customer base, and broadening our technology capabilities in existing and new markets through internal research and development and bolt-on acquisitions.
Customers
Chemetall Surface Treatment serves customers globally in a wide variety of industries with a diverse product portfolio. Our customer base ranges from local, small and mid-size companies to global, multinational Fortune 500 companies such as Airbus Group, Arcelor Mittal, Caterpillar, Daimler, Ford, Renault-Nissan, Novelis, PSA Peugeot Citroen and Hyundai/KIA, among many others.
Competition
We believe we are a global leader in the surface treatment market. Our global competitors include Henkel, Nihon Parkerizing, PPG Industries and Nippon Paint. Competition in this market is based primarily on customer service, product innovation and quality, and technological capabilities.
Raw Materials and Significant Supply Contracts
The major raw materials used in our Chemetall Surface Treatment segment include phosphoric acid and phosphates, as well as non-ferrous metals such as zinc and nickel. The raw materials used in our operations are purchased from various suppliers at prices that we believe are competitive. We secure our supply of phosphoric acid, which is used in our conversion coating process, through quarterly supply contracts with fixed prices. Phosphoric acid is produced from phosphate rock, and the majority of global phosphate rock reserves are located in Northern Africa, China, the Middle East, U.S. and Russia. Even though we do not expect a shortage of phosphate rock and phosphoric acid in the near term, we employ a global procurement strategy to mitigate the risk of supply disruptions. Non-ferrous metal products are traded on exchanges such as the London Metal Exchange (LME). We believe that zinc and nickel will be available in sufficient quantities for the foreseeable future.
Sales, Marketing and Distribution
We have an international strategic account program that uses cross-functional teams to serve large global customers. This program emphasizes creative strategies to improve and strengthen strategic customer relationships with emphasis on creating value for customers and promoting post-sale service. Complementing this program are regional Albemarle sales personnel around the world who serve numerous additional customers within North America, Europe, the Middle East, India, Asia Pacific, Russia, Africa and Latin America. We also utilize commissioned sales representatives and specialists in specific market areas, some of which are affiliated with subsidiaries of large chemical companies.
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Research and Development
We believe that in order to generate revenue growth, maintain our margins and remain competitive, we must continually invest in research and development, product and process improvements and specialized customer services. Through research and development, we continue to seek increased margins by introducing value-added products and proprietary processes and innovative green chemistry technologies. Our green chemistry efforts focus on the development of products that benefit society in a manner that minimizes waste and the use of raw materials and energy, avoids the use of toxic reagents and solvents and is produced in safe, environmentally friendly manufacturing processes. Green chemistry is encouraged with our researchers through periodic focus group discussions and special rewards and recognition for outstanding new green developments.
Our research and development efforts support each of our business segments. As of December 31, 2015, the focus of research in Performance Chemicals is divided among new and improved flame retardants, new uses for bromine and bromine-based products, curing agents and the development of efficient processes for the manufacture of chemical intermediates and actives for the pharmaceutical and agrichemical industries. Fire safety solutions research is focused primarily on developing new flame retardants which not only meet the higher performance requirements required by today’s polymer producers, formulators and original equipment manufacturers but which also have superior toxicological and environmental profiles. Another area of research is the development of bromine-based products for use as biocides in industrial water treatment and food safety applications and as additives used to reduce mercury emissions from coal-fired power plants. Curatives research is focused primarily on improving and extending our line of curing agents and formulations. The objective of the Lithium research and development effort is to develop innovative chemistries and technologies with applications relevant within targeted key markets. Research and development efforts are generally focused on both process development (e.g., pilot plant for the recycling of lithium ion batteries) as well as new product development (e.g., for lithium ion battery applications). PCS research efforts are focused on catalyst performance as well as process improvements.
Our Refining Solutions research is focused on the needs of our refinery catalysts customers. Refinery catalysts research is focused primarily on the development of more effective catalysts and related additives to produce clean fuels and to maximize the production of the highest value refined products through hydrotreating catalyst technologies. With regard to HOU, we focus our efforts on the production of more and better fuels from more complex and lower accessible/convertible feedstock through the use of novel FCC technologies.
Chemetall Surface Treatment’s research and development activities are focused on the development of products to meet customer demands that are also in accordance with regional environmental requirements. Our goal is to help solve our customers’ complex manufacturing challenges by developing proprietary formulations utilizing industry knowledge, expertise and a forward-looking team of individuals with manufacturing know-how. Our commitment to research and development and product portfolio enhancements are an important aspect of our business that characterizes Chemetall as a supplier of choice that creates value for our customers.
We have incurred research and development expenses of $102.9 million, $88.3 million and $82.2 million during 2015, 2014 and 2013, respectively.
Intellectual Property
Our intellectual property, including our patents, licenses and trade names, is an important component of our business. As of December 31, 2015, we owned approximately 3,000 active and approximately 1,500 pending patent applications in key strategic markets worldwide. We also have acquired rights under patents and inventions of others through licenses, and we license certain patents and inventions to third parties.
Regulation
Our business is subject to a broad array of employee health and safety laws and regulations, including those under the Occupational Safety and Health Act. We also are subject to similar state laws and regulations as well as local laws and regulations for our non-U.S. operations. We devote significant resources and have developed and implemented comprehensive programs to promote the health and safety of our employees and we maintain an active health, safety and environmental program. We finished 2015 with an occupational injury and illness rate of 0.60 for Albemarle employees and nested contractors, compared to 0.327 in 2014.
Our business and our customers also may be subject to significant requirements under the European Community Regulation for the Registration, Evaluation and Authorization of Chemicals (“REACH”). REACH imposes obligations on European Union manufacturers and importers of chemicals and other products into the European Union to compile and file comprehensive reports, including testing data, on each chemical substance, and perform chemical safety assessments. Additionally, substances of high concern—such as Carcinogenic, Mutagenic and Reprotoxic (“CMRs”); Persistent,
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Bioaccumulative and Toxic (“PBTs”); very Persistent, very Bioaccumulative (“vPvB”); and endocrine disruptors—will be subject to an authorization process. Authorization may result in restrictions in the use of products by application or even banning the product. The REACH regulations impose significant additional burdens on chemical producers, importers, downstream users of chemical substances and preparations, and the entire supply chain. Our significant manufacturing presence and sales activities in the European Union will require us to incur significant additional compliance costs and may result in increases in the costs of raw materials we purchase and the products we sell. Increases in the costs of our products could result in a decrease in their overall demand; additionally, customers may seek products that are not regulated by REACH, which could also result in a decrease in the demand of certain of our products subject to the REACH regulations.
Historically, there has been scrutiny of certain brominated flame retardants by regulatory authorities, legislative bodies and environmental interest groups in various countries. We manufacture a broad range of brominated flame retardant products, which are used in a variety of applications. Concern about the impact of some of our products on human health or the environment may lead to regulation, or reaction in our markets independent of regulation.
Environmental Regulation
We are subject to numerous foreign, federal, state and local environmental laws and regulations, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated properties. Ongoing compliance with such laws and regulations is an important consideration for us. Key aspects of our operations are subject to these laws and regulations. In addition, we incur substantial capital and operating costs in our efforts to comply with them.
Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities also may be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. We are subject to such laws, including the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as CERCLA or Superfund, in the U.S., and similar foreign and state laws. We may have liability as a potentially responsible party (“PRP”) with respect to active off-site locations under CERCLA or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third parties and settlements, which would provide for payment of our allocable share of remediation costs. Because the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under CERCLA and equivalent state statutes may be joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Accruals for these matters are included in the environmental reserve discussed below. Our management is actively involved in evaluating environmental matters and, based on information currently available to us, we have concluded that our outstanding environmental liabilities for unresolved waste sites currently known to us should not have a material effect on our operations.
We use and generate hazardous substances and wastes in our operations and may become subject to claims for personal injury and/or property damage relating to the release of such substances into the environment. In addition, some of our current properties are, or have been, used for industrial purposes, which could contain currently unknown contamination that could expose us to governmental requirements or claims relating to environmental remediation, personal injury and/or property damage. While we conduct our operations so as to minimize the risk of incurring such losses, the nature of our business and the types of operations in which we engage create a potential for such losses to occur. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of production, pollution and other environmental damages. Depending on the frequency and severity of such incidents, it is possible that the Company’s operating costs, insurability and relationships with customers, employees and regulators could be impaired. In particular, our customers may elect not to purchase our product if they view our safety record as unacceptable. This could also cause us to lose customers and substantial revenues. However, we believe that the likelihood of an environmental-related catastrophic occurrence or a series of occurrences that could materially affect the Company’s financial position or competitiveness is low.
We record accruals for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. It is possible that new information or future developments could require us to reassess our potential exposure related to environmental matters. We may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict
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environmental laws, regulations and orders of regulatory agencies, as well as claims for damages to property and the environment or injuries to employees and other persons resulting from our current or past operations, could result in substantial costs and liabilities in the future. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate. We cannot assure you that, as a result of former, current or future operations, there will not be some future impact on us relating to new regulations or additional environmental remediation or restoration liabilities. See “Safety and Environmental Matters” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 53.
Climate Change
The growing concerns about climate change and the related imposition by governments of more stringent regulations may provide us with new or expanded business opportunities. The Company seeks to capitalize on the “green revolution” by providing solutions to companies pursuing alternative fuel products and technologies (such as renewable fuels, gas-to-liquids and others), emission control technologies (including mercury emissions), alternative transportation vehicles and energy storage technologies and other similar solutions. As demand for, and legislation mandating or incentivizing the use of alternative fuel technologies that limit or eliminate greenhouse gas emissions increase, we continue to monitor the market and offer solutions where we have appropriate technology and believe we are well positioned to take advantage of opportunities that may arise if new legislation is enacted.
Recent Acquisitions, Joint Ventures and Divestitures
Over the last three years, we have devoted resources to acquisitions and joint ventures, including the subsequent integration of acquired businesses. These acquisitions and joint ventures have expanded our base business, provided our customers with a wider array of products and presented new alternatives for discovery through additional chemistries. Following is a summary of our acquisitions and joint ventures during recent years.
On January 12, 2015, we completed the acquisition of Rockwood for a purchase price of approximately $5.7 billion, with Rockwood becoming a wholly-owned subsidiary of Albemarle. Through the acquisition of Rockwood, we became a leading integrated and low cost global producer of lithium and lithium compounds used in lithium-ion batteries for electronic devices, alternative transportation vehicles and energy storage technologies, meeting the significant growth in global demand for these products. We are also now one of the largest global producers of surface treatments and coatings for metal processing, servicing the automotive, aerospace and general industrial markets. The acquisition of Rockwood reflects our commitment to drive sustainable growth.
On February 19, 2015, our Chemetall Surface Treatment segment completed the acquisition of all remaining shares of its Shanghai Chemetall joint venture for a purchase price of $57.6 million, and is now the sole owner of the entity.
On May 1, 2015, our Chemetall Surface Treatment segment completed the acquisition of the aluminum finishing business of Chemal GmbH & Co. KG (“Chemal GmbH”), based in Hamm, Germany. Cash paid in connection with this acquisition was approximately $2.2 million.
On December 23, 2015, we paid approximately $4.8 million in connection with the acquisition of the remaining noncontrolling interests’ share of Nanjing Chemetall Surface Technologies Co., Ltd.
In 2015, we announced our intention to pursue strategic alternatives, including divestitures, related to certain businesses which include minerals-based flame retardants and specialty chemicals, fine chemistry services and metal sulfides. On January 4, 2016, we completed the sale of our Tribotecc metal sulfides business to Treibacher Industrie AG for net proceeds of approximately $137 million. Included in the transaction were sites in Vienna and Arnoldstein, Austria, and Tribotecc’s proprietary sulfide synthesis process. On February 1, 2016, we completed the sale of our minerals-based flame retardants and specialty chemicals businesses to Huber Engineered Materials, a division of J.M. Huber Corporation, for net proceeds of approximately $187 million. The transaction includes Albemarle’s Martinswerk GmbH subsidiary and manufacturing facility located in Bergheim, Germany, and Albemarle’s 50% ownership interest in Magnifin Magnesiaprodukte GmbH, a joint-venture with Radex Heraklith Industriebeteiligung AG at Breitenau, Austria.
On September 1, 2014, we closed the sale of our antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc. and received net proceeds of $104.7 million. Included in the transaction were Albemarle’s manufacturing sites in Orangeburg, South Carolina and Jinshan, China, along with Albemarle’s antioxidant product lines manufactured in Ningbo, China.
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In 2014, the Company and ICL Industrial Products (“ICL”) announced entering into an agreement to establish a manufacturing joint venture for the production of ICL’s FR-122P polymeric flame retardant and Albemarle’s GreenCrest™ polymeric flame retardant. In 2015, the parties terminated their agreement due to the likelihood that, for purposes of competition law approvals, the duration of the proposed joint venture would need to be shortened to such an extent that the return on investment would no longer be attractive. In lieu of the joint venture, the parties have signed a long-term supply arrangement pursuant to which ICL would supply the GreenCrest™ polymeric flame retardant to the Company.
Employees
As of February 1, 2016, we had 6,963 employees of whom 2,990, or 43%, are employed in the U.S. and Latin America; 2,740, or 39%, are employed in Europe; 894, or 13%, are employed in Asia and 339, or 5%, are employed in the Middle East. Certain of these employees are represented by unions or works councils. We believe that we generally have a good relationship with our employees, and with the unions and works councils that represent certain employees.
Available Information
Our internet website address is http://www.albemarle.com. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as well as reports on Forms 3, 4 and 5 filed pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC. These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Albemarle.
Our Corporate Governance Guidelines, Code of Business Conduct and the charters of the Audit and Finance, Health, Safety and Environment, Executive Compensation, and Nominating and Governance Committees are also available on our website and are available in print to any shareholder upon request by writing to Investor Relations, 451 Florida Street, Baton Rouge, Louisiana 70801, or by calling (225) 388-8011.
Item 1A. | Risk Factors. |
You should consider carefully the following risks when reading the information, including the financial information, contained in this Annual Report on Form 10-K.
Adverse conditions in the global economy and volatility and disruption of financial markets can negatively impact our customers, suppliers and other business partners and therefore have a material adverse effect on our results of operations.
A global or regional economic downturn may reduce customer demand or inhibit our ability to produce our products, negatively impacting our operating results. Our business and operating results have been and will continue to be sensitive to global economic downturns (including credit market tightness which can impact our liquidity as well as our customers, suppliers and other business partners), declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates and other challenges that can affect the global economy. Our customers may experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing or potential customers can delay or cancel plans to purchase products and may not be able to fulfill their obligations in a timely fashion. Further, suppliers and other business partners may be experiencing similar conditions, which could impact their ability to fulfill their obligations to us. Also, it could be difficult to find replacements for certain of those business partners without incurring significant delays or cost increases. If the current weakness in much of the global economy continues or deepens significantly, our results of operations, financial condition and cash flows could be materially adversely affected.
Our inability to secure key raw materials, or to pass through increases in costs and expenses for other raw materials and energy, on a timely basis or at all, could have an adverse effect on the margins of our products and our results of operations.
The long-term profitability of our operations will be, in part, related to our ability to continue to economically obtain resources, including energy and raw materials. For example, our lithium and bromine businesses rely upon our continued ability to produce, or otherwise obtain, lithium and bromine of sufficient quality in adequate amounts to support our operations. If we fail to secure and retain the rights to continue to access these key raw materials, we may have to restrict or suspend our operations that rely upon these key resources, which could harm our business, results of operations and financial condition. In addition, other raw material and energy costs account for a significant percentage of our total costs of products sold, even if they can be obtained on commercially reasonable terms. Our raw material and energy costs can be volatile and may increase
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significantly. Increases are primarily driven by significantly tighter market conditions and major increases in the pricing of basic building blocks for our products such as crude oil, chlorine and metals (including molybdenum and rare earths which are used in the refinery catalysts business). We generally attempt to pass through changes in the prices of raw materials and energy to our customers, but we may be unable to or be delayed in doing so. Our inability to efficiently and effectively pass through price increases, or inventory impacts resulting from price volatility, could adversely affect our margins.
We face competition from other specialty chemical companies, which places downward pressure on the prices and margins of our products.
We operate in a highly competitive marketplace, competing against a number of global specialty chemical producers. Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply and responsiveness of product development in cooperation with customers and customer service. Some of our competitors are larger than we are and may have greater financial resources. In addition, our products are facing increasing competition from market participants in China. These competitors may also be able to maintain significantly greater operating and financial flexibility than we do. As a result, these competitors may be better able to withstand changes in conditions within our industry, changes in the prices of raw materials and energy and in general economic conditions. Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could affect our margins and profitability adversely. Our ability to maintain or increase our profitability is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin chemical products and improving existing products through innovation and research and development. If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors.
Within the end-use markets in which we compete, competition between products is intense. Substitute products also exist for many of our products. Therefore, we face substantial risk that certain events, such as new product development by our competitors, changing customer needs, production advances for competing products, price changes in raw materials and products, our failure to secure patents or the expiration of patents, could result in declining demand for our products as our customers switch to substitute products or undertake manufacturing of such products on their own. If we are unable to develop, produce or market our products to effectively compete against our competitors, our results of operations may materially suffer.
We believe that our customers are increasingly looking for strong, long-term relationships with a few key suppliers that help them improve product performance, reduce costs, or support new product development. To satisfy these growing customer requirements, our competitors have been consolidating within product lines through mergers and acquisitions. We may also need to invest and spend more on research and development and marketing costs to strengthen existing customer relationships, as well as attract new customers. Our indebtedness could limit our flexibility to react to these industry trends and our ability to remain competitive.
Albemarle’s brands, product image and trademarks represent the unique product identity of each of our products and are important symbols of the Company’s reputation. Accordingly, the performance of our business could be adversely affected by any marketing and promotional materials used by our competitors that make false or unsubstantiated claims, implies immoral or improper conduct or is otherwise disparaging to our Company or its products. Further, our own actions could hurt such brands, product image and trademarks if our products underperform or we otherwise draw negative publicity.
Downturns in our customers’ cyclical industries could adversely affect our sales and profitability.
Downturns in the businesses that use our specialty chemicals will adversely affect our sales. Many of our customers are in industries, including the electronics, building and construction, oilfield and automotive industries, that are cyclical in nature and sensitive to changes in general economic conditions. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future. A decline in economic conditions in our customers’ cyclical industries may have a material adverse effect on our sales and profitability.
Our results are subject to fluctuation because of irregularities in the demand for our HPC catalysts and certain of our agrichemicals.
Our HPC catalysts are used by petroleum refiners in their processing units to reduce the quantity of sulfur and other impurities in petroleum products. The effectiveness of HPC catalysts diminishes with use, requiring the HPC catalysts to be replaced, on average, once every one to three years. The sales of our HPC catalysts, therefore, are largely dependent on the useful life cycle of the HPC catalysts in the processing units and may vary materially by quarter. In addition, the timing and profitability of HPC catalysts sales can have a significant impact on revenue and profit in any one quarter. Sales of our agrichemicals are also subject to fluctuation as demand varies depending on climate and other environmental conditions, which
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may prevent or reduce farming for extended periods. In addition, crop pricing and timing of when farms alternate from one crop to another crop in a particular year can also alter sales of agrichemicals.
Changes in our customers’ products can reduce the demand for our specialty chemicals.
Our customers use our specialty chemicals for a broad range of applications. Changes in our customers’ products or processes may enable our customers to reduce consumption of the specialty chemicals that we produce or make our specialty chemicals unnecessary. Customers may also find alternative materials or processes that no longer require our products. Should a customer decide to use a different material due to price, performance or other considerations, we may not be able to supply a product that meets the customer’s new requirements. Consequently, it is important that we develop new products to replace the sales of products that mature and decline in use. Our business, results of operations, cash flows and margins could be materially adversely affected if we are unable to manage successfully the maturation of our existing products and the introduction of new products.
Our research and development efforts may not succeed and our competitors may develop more effective or successful products.
The specialty chemicals industry is subject to periodic technological change and ongoing product improvements. In order to maintain our margins and remain competitive, we must successfully develop, manufacture and market new or improved products. As a result, we must commit substantial resources each year to research and development. Ongoing investments in research and development for future products could result in higher costs without a proportional increase in revenues. Additionally, for any new product program, there is a risk of technical or market failure in which case we may not be able to develop the new commercial products needed to maintain our competitive position or we may need to commit additional resources to new product development programs. Moreover, new products may have lower margins than the products they replace.
Our industries and the end-use markets into which we sell our products experience periodic technological change and product improvement. Manufacturers periodically introduce new generations of products or require new technological capacity to develop customized products. Our future growth will depend on our ability to gauge the direction of the commercial and technological progress in all key end-use markets and upon our ability to fund and successfully develop, manufacture and market products in such changing end-use markets. We will have to continue to identify, develop, market and in certain cases, secure regulatory approval for innovative products on a timely basis to replace or enhance existing products in order to maintain our profit margins and our competitive position. We may not be successful in developing new products and/or technology, either alone or with third parties, or licensing intellectual property rights from third parties on a commercially competitive basis. Our new products may not be accepted by our customers or may fail to receive regulatory approval. If we fail to keep pace with the evolving technological innovations in our end-use markets on a competitive basis, our business, financial condition and results of operations could be adversely affected.
We also expect competition to increase as our competitors develop and introduce new and enhanced products. As new products enter the market, our products may become obsolete or competitors’ products may be marketed more effectively than our products. If we fail to develop new products, maintain or improve our margins with our new products or keep pace with technological developments, our business, financial condition, results of operations and cash flows will suffer.
Our inability to protect our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
Protection of our proprietary processes, methods and compounds and other technology is important to our business. We generally rely on patent, trade secret, trademark and copyright laws of the U.S. and certain other countries in which our products are produced or sold, as well as licenses and nondisclosure and confidentiality agreements, to protect our intellectual property rights. The patent, trade secret, trademark and copyright laws of some countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide meaningful protection against competitors or against competitive technologies. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.
We also conduct research and development activities with third parties and license certain intellectual property rights from third parties and we plan to continue to do so in the future. We endeavor to license or otherwise obtain intellectual property rights on terms favorable to us. However, we may not be able to license or otherwise obtain intellectual property rights on such terms or at all. Our inability to license or otherwise obtain such intellectual property rights could have a material
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adverse effect on our ability to create a competitive advantage and create innovative solutions for our customers, which will adversely affect our net sales and our relationships with our customers.
We could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for damages and we may be required to change our processes, redesign our products partially or completely, pay to use the technology of others, stop using certain technologies or stop producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
Our business and operations could suffer in the event of cyber-security breaches.
Attempts by others to gain unauthorized access to our information technology systems become more sophisticated over time. These attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. We seek to detect and investigate all security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any cyber-security breach results in inappropriate disclosure of our customers’ or licensees’ confidential information, we may incur liability as a result.
Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.
We conduct a substantial portion of our business outside of the U.S. We expect sales from international markets to continue to represent a significant portion of our net sales and the net sales of our joint ventures. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following:
• | fluctuations in foreign currency exchange rates may affect product demand and may adversely affect the profitability in U.S. Dollars of products and services we provide in international markets where payment for our products and services is made in the local currency; |
• | transportation and other shipping costs may increase; |
• | intellectual property rights may be more difficult to enforce; |
• | increased cost of, and decreased availability of raw materials; |
• | changes in foreign laws and tax rates or U.S. laws and tax rates with respect to foreign income may unexpectedly increase the rate at which our income is taxed, impose new and additional taxes on remittances, repatriation or other payments by subsidiaries, or cause the loss of previously recorded tax benefits; |
• | foreign countries may adopt other restrictions on foreign trade or investment, including currency exchange controls; |
• | trade sanctions could result in losing access to customers and suppliers in those countries; |
• | unexpected adverse changes in foreign laws or regulatory requirements may occur; |
• | agreements may be difficult to enforce and receivables difficult to collect; |
• | compliance with a variety of foreign laws and regulations may be burdensome; |
• | compliance with anti-bribery and anti-corruption laws may be costly; |
• | unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining export licenses; |
• | general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries; |
• | foreign operations may experience staffing difficulties and labor disputes; |
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• | foreign governments may nationalize private enterprises; and |
• | our business and profitability in a particular country could be affected by political or economic repercussions from terrorist activities and the response to such activities, the possibility of hyperinflationary conditions and political instability in certain countries. |
In addition, certain of our joint ventures operate, and we have ongoing capital projects in, high-risk regions of the world such as the Middle East and South America. Unanticipated events such as geopolitical changes could result in a write-down of our investment in the affected joint venture or a delay or cancellation of those capital projects, which could negatively impact our future growth and profitability. Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we and our joint ventures do business.
Furthermore, our subsidiaries are subject to rules and regulations related to anti-bribery prohibitions of the U.S. and other countries and export controls and economic embargoes, violations of which may carry substantial penalties. For example, export control and economic embargo regulations limit the ability of our subsidiaries to market, sell, distribute or otherwise transfer their products or technology to prohibited countries or persons. Failure to comply with these regulations could subject our subsidiaries to fines, enforcement actions and/or have an adverse effect on our reputation and the value of our common stock.
Changes in, or the interpretation of, tax legislation or rates throughout the world could materially impact our results.
Our future effective tax rate and related tax balance sheet attributes could be impacted by changes in tax legislation throughout the world. Currently, the majority of our net sales are generated from customers located outside of the U.S., and a substantial portion of our assets and employees are located outside of the U.S. If these funds are needed for our operations in the U.S., we believe we will be able to access such funds in a tax efficient manner to satisfy cash flow needs.
We have not accrued income taxes or foreign withholding taxes on undistributed earnings for most non-U.S. subsidiaries, because those earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. Certain tax proposals with respect to such earnings could substantially increase our tax expense, which would substantially reduce our income and have a material adverse effect on our results of operations and cash flows from operating activities. Currently, there are no contemplated cash distributions that will result in incremental U.S. taxes payable in excess of applicable foreign tax credits related to such undistributed earnings. As a result, we have not provided any deferred income taxes on the portion of undistributed foreign earnings determined not to be permanently reinvested in foreign operations.
Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, expirations of tax holidays, changes in the assessment regarding the realization of the valuation of deferred tax assets, or changes in tax laws and regulations or their interpretation. We are subject to the regular examination of our income tax returns by various tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes. It is possible the outcomes from these examinations will have a material adverse effect on our financial condition and operating results.
We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and net income.
We conduct our business and incur costs in the local currency of most of the countries in which we operate. The financial condition and results of operations of each foreign operating subsidiary and joint venture are reported in the relevant local currency and then translated to U.S. Dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded levels of our assets, liabilities, net sales, cost of goods sold and operating margins and could result in exchange losses. The primary currencies to which we have exposure are the European Union Euro, Japanese Yen, Singapore Dollar, Chinese Renminbi, Australian Dollar, Chilean Peso and the British Pound Sterling. Exchange rates between these currencies and the U.S. Dollar in recent years have fluctuated significantly and may do so in the future. With respect to our potential exposure to foreign currency fluctuations and devaluations, for the year ended December 31, 2015, approximately 42% of our net sales were denominated in such currencies. Significant changes in these foreign currencies relative to the U.S. Dollar could also have an adverse effect on our ability to meet interest and principal payments on any foreign currency-denominated debt outstanding. In addition to currency translation risks, we incur currency transaction risks whenever one of our operating subsidiaries or joint ventures enters into either a purchase or a sales transaction using a different currency from its functional currency. Our operating results and net income may be affected by any volatility in currency exchange rates and our ability to manage effectively our currency transaction and translation risks.
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Our business could be adversely affected by environmental, health and safety laws and regulations to which our raw materials, products and facilities are subject.
In the jurisdictions in which we operate, we are subject to numerous federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated properties. Further, some of the raw materials we handle are subject to government regulation. These regulations affect the manufacturing processes, handling, uses and applications of our products. In addition, our production facilities and a number of our distribution centers require numerous operating permits that are subject to renewal. Due to the nature of these requirements and changes in our operations, our operations may exceed limits under permits or we may not have the proper permits to operate our operations. Ongoing compliance with such laws, regulations and permits is an important consideration for us and we incur substantial capital and operating costs in our compliance efforts. Environmental laws have become increasingly strict in recent years. We expect this trend to continue and anticipate that compliance will continue to require increased capital expenditures and operating costs.
Compliance with environmental laws generally increases the costs of manufacturing, the cost of registration/approval requirements, the costs of transportation and storage of raw materials and finished products, as well as the costs of the storage and disposal of wastes, and could have a material adverse effect on our results of operations. We may incur substantial costs, including fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in our operations, for violations arising under these laws or permit requirements. Furthermore, environmental laws are subject to change and have tended to become stricter over time. Such changes in environmental laws or their interpretation, or the enactment of new environmental laws, could result in materially increased capital expenditures and compliance costs.
Violations of environmental, health and safety laws and regulations may subject us to fines, penalties and other liabilities and may require us to change certain business practices or curtail production.
If we violate environmental, health and safety laws or regulations, in addition to being required to correct such violations, we can be held liable in administrative, civil or criminal proceedings for substantial fines and other sanctions could be imposed that could disrupt or limit our operations. Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities may also be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. Such liabilities can be difficult to identify and the extent of any such liabilities can be difficult to predict. We use, and in the past have used, hazardous substances at many of our facilities, and we have in the past, and may in the future, be subject to claims relating to exposure to hazardous materials and the associated liabilities may be material. We also have generated, and continue to generate, hazardous wastes at a number of our facilities. Some of our facilities also have lengthy histories of manufacturing or other activities that have resulted in site contamination. We have also given contractual indemnities for environmental conditions relating to facilities we no longer own or operate. The nature of our business, including historical operations at our current and former facilities, exposes us to risks of liability under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury if released into the environment. Additional information may arise in the future concerning the nature or extent of our liability with respect to identified sites, and additional sites may be identified for which we are alleged to be liable, that could cause us to materially increase our environmental accrual or the upper range of the costs we believe we could reasonably incur for such matters.
We may be subject to indemnity claims and liable for other payments relating to properties or businesses we have divested.
In connection with the sale of certain properties and businesses, we have agreed to indemnify the purchasers for certain types of matters, such as certain breaches of representations and warranties, taxes and certain environmental matters.
With respect to environmental matters, the discovery of contamination arising from properties that we have divested may expose us to indemnity obligations under the sale agreements with the buyers of such properties or cleanup obligations and other damages under applicable environmental laws.
We may not have insurance coverage for such indemnity obligations or cash flows to make such indemnity or other payments. Further, we cannot predict the nature of and the amount of any indemnity or other obligations we may have to the applicable purchaser. Such payments may be costly and may adversely affect our financial condition and results of operations.
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Contractual indemnities may be ineffective in protecting us from environmental liabilities.
At several of our properties where hazardous substances are known to exist (including some sites where hazardous substances are being investigated or remediated), we believe we are entitled to contractual indemnification from one or more former owners or operators; however, in the event we make a claim, the indemnifier may disagree with us or not have the financial capacity to fulfill its indemnity obligation. If our contractual indemnity is not upheld or effective, our accrual and/or our costs for the investigation and cleanup of hazardous substances could increase materially.
We may be exposed to certain regulatory and financial risks related to climate change.
Growing concerns about climate change may result in the imposition of additional regulations or restrictions to which we may become subject. Climate changes include changes in rainfall and in storm patterns and intensities, water shortages, significantly changing sea levels and increasing atmospheric and water temperatures, among others. For example, there have been concerns regarding the declining water level of the Dead Sea, from which our joint venture, JBC, produces bromine. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to climate change. For example, some of our operations are within jurisdictions that have, or are developing, regulatory regimes governing greenhouse gas emissions. Potentially, additional U.S. federal regulation will be forthcoming with respect to greenhouse gas emissions (including carbon dioxide) and/or “cap and trade” legislation that could have impacts on our operations. In addition, we have operations in the European Union, Brazil, China, Japan, Jordan, Saudi Arabia, Singapore and the United Arab Emirates, which have implemented measures to achieve objectives under the Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change (“UNFCC”), which set binding targets for reducing greenhouse gas emissions. The first commitment period under the Kyoto Protocol expired in 2012. An amendment was passed by the UNFCC during the December 2012 Doha climate change talks that would implement a second commitment period through 2020. As of February 11, 2016, 60 countries have ratified the 2012 amendments. In December 2015, the 21st Conference of Parties for the UNFCC concluded with more than 190 countries adopting the Paris Agreement, a partly binding and partly voluntary agreement to cut global carbon emissions in an effort to limit the rise in global temperatures. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, fees or restrictions on certain activities. While certain climate change initiatives may result in new business opportunities for us in the area of alternative fuel technologies and emissions control, compliance with these initiatives may also result in additional costs to us, including, among other things, increased production costs, additional taxes, reduced emission allowances or additional restrictions on production or operations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Even without such regulation, increased public awareness and adverse publicity about potential impacts on climate change emanating from us or our industry could harm us. We may not be able to recover the cost of compliance with new or more stringent laws and regulations, which could adversely affect our business and negatively impact our growth. Furthermore, the potential impacts of climate change and related regulation on our customers are highly uncertain and may adversely affect us.
Regulation, or the threat of regulation, of some of our products could have an adverse effect on our sales and profitability.
We manufacture or market a number of products that are or have been the subject of attention by regulatory authorities and environmental interest groups. For example, for many years we have marketed methyl bromide, a chemical that is particularly effective as a soil fumigant. In recent years, the market for methyl bromide has changed significantly, driven by the Montreal Protocol of 1990 and related regulations prompted by findings regarding the chemical’s potential to deplete the ozone layer. Completion of the phase-out of methyl bromide as a fumigant took effect January 1, 2005, with critical uses allowed on an annual basis until feasible alternatives are available.
Over the past decade, there has been increasing scrutiny of certain brominated flame retardants by regulatory authorities, legislative bodies and environmental interest groups in various countries. We manufacture a broad range of brominated flame retardant products, which are used in a variety of applications to protect people, property and the environment from the negative consequences of fire. Concern about the impact of some of our products on human health or the environment may lead to regulation, or reaction in our markets independent of regulation, that could reduce or eliminate markets for such products.
Agencies in the European Union continue to evaluate the risks to human health and the environment associated with certain brominated flame retardants such as tetrabromobisphenol A and decabromodiphenylethane, both of which we manufacture. Additional government regulations, including limitations or bans on the use of brominated flame retardants, could result in a decline in our net sales of brominated flame retardants and have an adverse effect on our sales and profitability. In addition, the threat of additional regulation or concern about the impact of brominated flame retardants on human health or the environment could lead to a negative reaction in our markets that could reduce or eliminate our markets for these products, which could have an adverse effect on our sales and profitability.
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We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications.
Our products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications or has a shorter useful life than guaranteed, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as guaranteed. These risks apply to our refinery catalysts in particular because, in certain instances, we sell our refinery catalysts under agreements that contain limited performance and life cycle guarantees. Also, because many of our products are integrated into our customers’ products, we may be requested to participate in, or fund in whole or in part the costs of, a product recall conducted by a customer. For example, some of our businesses supply products to customers in the automotive industry. In the event one of these customers conducts a product recall that it believes is related to one of our products, we may be asked to participate in or fund in whole or in part such a recall.
Our customers often require our subsidiaries to represent that our products conform to certain product specifications provided by our customers. Any failure to comply with such specifications could result in claims or legal action.
A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.
Our business is subject to hazards common to chemical businesses, any of which could injure our employees or other persons, damage our facilities or other properties, interrupt our production and adversely affect our reputation and results of operations.
Our business is subject to hazards common to chemical manufacturing, storage, handling and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks. These hazards can cause personal injury and loss of life to our employees and other persons, severe damage to, or destruction of, property and equipment and environmental contamination. In addition, the occurrence of material operating problems at our facilities due to any of these hazards may diminish our ability to meet our output goals. Accordingly, these hazards and their consequences could adversely affect our reputation and have a material adverse effect on our operations as a whole, including our results of operations and cash flows, both during and after the period of operational difficulties.
Natural disasters and weather-related matters could impact our results of operations.
Historically, major hurricanes have caused significant disruption to the operations on the U.S. Gulf Coast for many of our customers and our suppliers of certain raw materials, which had an adverse impact on volume and cost for some of our products. Our operations at the Salar de Atacama, in Chile, could be subject to significant rain events and earthquakes. If similar weather-related matters or other natural disasters occur in the future, they could negatively affect the results of operations at our sites in the affected regions as well as have adverse impacts on the global economy.
The insurance that we maintain may not fully cover all potential exposures.
We maintain property, business interruption and casualty insurance but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental remediation. In addition, from time to time, various types of insurance for companies in the specialty chemical industry have not been available on commercially acceptable terms or, in some cases, have not been available at all. We are potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able to obtain coverage at current levels, if at all, and our premiums may increase significantly on coverage that we maintain.
We may incur significant charges in the event we close or divest all or part of a manufacturing plant or facility.
We continually assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close or divest all or part of a manufacturing plant or facility. We also have shared services agreements at several of our plants and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations. The closure or divestiture of all or part of a manufacturing plant or facility could result in future charges that could be significant.
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If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse effect on our business.
The unanticipated departure of any key member of our management team could have an adverse effect on our business. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.
Some of our employees are unionized, represented by workers’ councils or are employed subject to local laws that are less favorable to employers than the laws of the U.S.
As of February 1, 2016, we had 6,963 employees. Certain of these employees are represented by unions or works councils. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by workers’ councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure our workforce. Although we believe that we have a good working relationship with our employees, a strike, work stoppage, slowdown or significant dispute with our employees could result in a significant disruption of our operations or higher ongoing labor costs.
Our joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations, which may adversely affect our results of operations and may force us to dedicate additional resources to these joint ventures.
We currently participate in a number of joint ventures and may enter into additional joint ventures in the future. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our results of operations may be adversely affected and we may be required to increase the level of our commitment to the joint venture. Also, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from their business plans, our results of operations could be adversely affected.
We may not be able to successfully integrate the businesses of Albemarle and Rockwood and therefore may not be able to realize the anticipated benefits of the Merger.
Realization of the anticipated benefits in the Merger will depend, in part, on our ability to successfully integrate the businesses and operations of Albemarle and Rockwood. We will be required to devote significant management attention and resources to integrating business practices, operations and support functions.
Our success after the Merger will also depend in part upon our ability to retain key employees subsequent to the Merger. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration of the two companies’ operations could have an adverse effect on our business, financial results, financial condition or our stock price. The integration process may also result in additional and unforeseen expenses. There can be no assurance that the contemplated synergies anticipated from the Merger will be realized, or maintained if realized. If the integration is not successful, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset the integration and restructuring costs over time.
We may not be able to consummate future acquisitions or integrate acquisitions into our business, which could result in unanticipated expenses and losses.
As part of our business growth strategy, we have acquired businesses and entered into joint ventures in the past and intend to pursue acquisitions and joint venture opportunities in the future. Our ability to implement this component of our growth strategy will be limited by our ability to identify appropriate acquisition or joint venture candidates and our financial resources, including available cash and borrowing capacity. The expense incurred in consummating acquisitions or entering into joint ventures, the time it takes to integrate an acquisition or our failure to integrate businesses successfully, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions or joint ventures.
The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with the integration of acquisitions include:
• | potential disruption of our ongoing business and distraction of management; |
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• | unforeseen claims and liabilities, including unexpected environmental exposures; |
• | unforeseen adjustments, charges and write-offs; |
• | problems enforcing the indemnification obligations of sellers of businesses or joint venture partners for claims and liabilities; |
• | unexpected losses of customers of, or suppliers to, the acquired business; |
• | difficulty in conforming the acquired businesses’ standards, processes, procedures and controls with our operations; |
• | variability in financial information arising from the implementation of purchase price accounting; |
• | inability to coordinate new product and process development; |
• | loss of senior managers and other critical personnel and problems with new labor unions; and |
• | challenges arising from the increased scope, geographic diversity and complexity of our operations. |
Although our pension plans currently meet minimum funding requirements, events could occur that would require us to make significant contributions to the plans and reduce the cash available for our business.
We have several defined benefit pension plans around the world, including in the U.S., United Kingdom (“U.K.”), Germany, Belgium, and Japan, covering most of our employees. We are required to make cash contributions to our pension plans to the extent necessary to comply with minimum funding requirements imposed by the various countries’ benefit and tax laws. The amount of any such required contributions will be determined annually based on an actuarial valuation of the plans as performed by the plans’ actuaries.
In previous years, we have made voluntary contributions to our U.S. qualified defined benefit pension plans. We anticipate approximately $8.0 million of required cash contributions during 2016 for our defined benefit pension plans. Additional voluntary pension contributions in and after 2016 may vary depending on factors such as asset returns, interest rates, and legislative changes. The amounts we may elect or be required to contribute to our pension plans in the future may increase significantly. These contributions could be substantial and would reduce the cash available for our business.
Further, an economic downturn or recession or market disruption in the capital and credit markets may adversely impact the value of our pension plan assets, our results of operations, our statement of changes in stockholders’ equity and our liquidity. For example, we have several pension plans located in Germany, Belgium, Japan and the U.S. Our funding obligations could change significantly based on the investment performance of the pension plan assets and changes in actuarial assumptions for local statutory funding valuations. Any deterioration of the capital markets or returns available in such markets may negatively impact our pension plan assets and increase our funding obligations for one or more of these plans and negatively impact our liquidity. We cannot predict the impact of this or any further market disruption on our pension funding obligations.
The occurrence or threat of extraordinary events, including domestic and international terrorist attacks, may disrupt our operations and decrease demand for our products.
Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the U.S. and throughout the world. As a result, we are subject to existing federal rules and regulations (and may be subject to additional legislation or regulations in the future) that impose site security requirements on chemical manufacturing facilities, which increase our overhead expenses.
We are also subject to federal regulations that have heightened security requirements for the transportation of hazardous chemicals in the U.S. We believe we have met these requirements but additional federal and local regulations that limit the distribution of hazardous materials are being considered. We ship and receive materials that are classified as hazardous. Bans on movement of hazardous materials through cities, like Washington, D.C., could affect the efficiency of our logistical operations. Broader restrictions on hazardous material movements could lead to additional investment to produce hazardous raw materials and change where and what products we manufacture.
The occurrence of extraordinary events, including future terrorist attacks and the outbreak or escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to negatively affect the economy in general and specifically the markets for our products. The resulting damage from a direct attack on our assets, or assets used by us, could include loss of life and property damage. In addition, available insurance coverage may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive.
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We will need a significant amount of cash to service our indebtedness and our ability to generate cash depends on many factors beyond our control.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on a range of economic, competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from operations to service our debt obligations. If we are unable to service our debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, reduce or delay capital expenditures, sell assets or raise additional equity. We may not be able to refinance any of our indebtedness, sell assets or raise additional equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, could have a material adverse effect on our business and financial condition.
Restrictive covenants in our debt instruments may adversely affect our business.
Our February 2014 credit agreement and the indentures governing our senior notes contain select restrictive covenants. These covenants provide constraints on our financial flexibility. The failure to comply with the covenants in our February 2014 credit agreement, the indentures governing the senior notes and the agreements governing other indebtedness, including indebtedness incurred in the future, could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. See “Financial Condition and Liquidity—Long-Term Debt” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 50.
A downgrade of the ratings on our debt or an increase in interest rates could cause our debt service obligations to increase.
Borrowings under our February 2014 credit agreement, our commercial paper program and our September 2015 term loan agreement bear interest at floating rates. The rates under our February 2014 credit agreement and our September 2015 term loan agreement are subject to adjustment based on the ratings of our senior unsecured long-term debt by Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Services (“Moody’s”) and Fitch Ratings (“Fitch”). S&P has rated our senior unsecured long-term debt as BBB-, Moody’s has rated our senior unsecured long-term debt as Baa3, and Fitch has rated our senior unsecured long-term debt as BBB-. S&P has rated our commercial paper as A-3, Moody’s has rated it as P-3 and Fitch has rated it as F-3. S&P, Moody’s and/or Fitch may downgrade our ratings in the future. The downgrading of any of our ratings or an increase in any of the benchmark interest rates would result in an increase of our interest expense on our variable rate borrowings.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading would likely increase our cost of future financing, could limit our access to the capital markets and have an adverse effect on the market price of our securities.
Because a significant portion of our operations is conducted through our subsidiaries and joint ventures, our ability to service our debt may be dependent on our receipt of distributions or other payments from our subsidiaries and joint ventures.
A significant portion of our operations is conducted through our subsidiaries and joint ventures. As a result, our ability to service our debt may be partially dependent on the earnings of our subsidiaries and joint ventures and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. In addition, there may be significant tax and other legal restrictions on the ability of non-U.S. subsidiaries or joint ventures to remit money to us.
We may continue to expand our business through acquisitions and we may incur additional indebtedness, including indebtedness related to acquisitions.
We have historically expanded our business primarily through acquisitions. A part of our business strategy is to continue to grow through acquisitions that complement our existing technologies and accelerate our growth. Because the consummation of acquisitions and integration of acquired businesses involves significant risk, this means that investors in our securities will be subject to the risks inherent in our acquisition strategy. In addition, the indentures governing our senior notes does not limit our
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ability to incur additional indebtedness in connection with acquisitions or otherwise. Our credit facilities have limited financial maintenance covenants. As a result, we may incur substantial additional indebtedness in connection with acquisitions.
As a result of the Merger, Albemarle, on a consolidated basis, incurred substantial additional indebtedness and related debt service obligations. This additional indebtedness and the related debt service obligations could have important consequences, including:
• | reducing flexibility in planning for, or reacting to, changes in our businesses, the competitive environment and the industries in which we operate, and to technological and other changes; |
• | lowering credit ratings; |
• | reducing access to capital and increasing borrowing costs generally or for any additional indebtedness to finance future operating and capital expenses and for general corporate purposes; |
• | reducing funds available for operations, capital expenditures and other activities; and |
• | creating competitive disadvantages relative to other companies with lower debt levels. |
We may be subject to increased tax exposure resulting from Rockwood pre-acquisition periods.
Under the terms of certain purchase agreements, third party sellers have agreed to substantially indemnify us for tax liabilities pertaining to Rockwood’s pre-acquisition periods generally until the applicable statutes of limitations expire. To the extent such companies fail to indemnify or satisfy their obligations, or if any amount is not covered by the terms of the indemnity, earnings could be negatively impacted in future periods through increased tax expense.
We have not established proven or probable reserves through the completion of a feasibility study for the minerals that we produce.
We have not established proven or probable reserves, as defined by the SEC under Industry Guide 7, through the completion of a “final” or “bankable” feasibility study for any of the minerals that we produce. Furthermore, we have no plans to establish proven or probable reserves for any of our projects. Since we commenced production without having established proven or probable reserves, there may be greater inherent uncertainty as to whether or not mineralized material can be economically obtained as originally planned and anticipated. Also, because we do not have any proven or probable reserves, we may not be able to continue to produce such minerals at existing levels or to expand our production capacity in the future which could harm our business, results or operations and financial condition.
Future events may impact our deferred tax asset position and U.S deferred federal income taxes on undistributed earnings of international affiliates that are considered to be reinvested indefinitely.
We evaluate our ability to utilize deferred tax assets and our need for a valuation allowance based on available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be utilized. In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases), to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets. The utilization of our deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry-back or carry-forward periods under the tax law. Due to significant estimates used to establish the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in future reporting periods. Changes to the valuation allowance or the amount of deferred tax liabilities could have a materially adverse effect on our business, financial condition and results of operations. Further, should we change our assertion regarding the permanent reinvestment of the undistributed earnings in foreign operations, a deferred tax liability may need to be established.
If our goodwill, intangible assets or long-lived assets become impaired, we may be required to record a significant charge to earnings.
Under U.S. Generally Accepted Accounting Principles (“GAAP”), we review our intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment on October 31 of each year, or more frequently if required. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill, intangible assets or long-lived assets may not be recoverable, include, but are not limited to, a decline in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We may be required to record a significant charge in our financial statements during the
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period in which any impairment of our goodwill, intangible assets or long-lived assets is determined, negatively impacting our results of operations.
Our required capital expenditures may exceed our estimates.
Our capital expenditures for continuing operations generally consist of expenditures to maintain and improve existing equipment and substantial investments in new equipment. Commencement of production requires start-up, commission and certification of product quality by our customers, which may impact the expected timing of sales of product from such facility. Construction of large chemical operations is subject to numerous risks and uncertainties, including, among others, the ability to complete the project on a timely basis and in accordance with the estimated budget for such project and our ability to estimate future demand for our products.
Future capital expenditures may be significantly higher, depending on the investment requirements of each of our business lines, and may also vary substantially if we are required to undertake actions to compete with new technologies in our industry. We may not have the capital necessary to undertake these capital investments. If we are unable to do so, we may not be able to effectively compete in some of our markets.
Item 1B. | Unresolved Staff Comments. |
NONE
Item 2. | Properties. |
We operate on a global basis. Our principal executive offices in Baton Rouge, LA, and regional shared services offices in Budapest, Hungary and Dalian, China are leased. We and our affiliates also operate regional sales and administrative offices in various locations throughout the world, which are generally leased. Effective as of June 2016, our principal executive offices will be located in Charlotte, NC.
We believe that our production facilities, research and development facilities, and sales and administrative offices are generally well maintained, effectively used and are adequate to operate our business. During 2015, the Company’s manufacturing plants operated at approximately 73% capacity in the aggregate.
Set forth below is information regarding our significant production facilities operated by our affiliates and us:
Location | Business Segment in 2015 | Principal Use | Owned/Leased | |||
Amsterdam, the Netherlands | Refining Solutions | Production of refinery catalysts, research and product development activities | Owned | |||
Auckland, New Zealand | Chemetall Surface Treatment | Production of surface treatment chemicals for general industry, aerospace, and other pre-treatment technologies | Leased | |||
Baton Rouge, Louisiana | Performance Chemicals | Research and product development activities, and production of flame retardants, catalysts and additives | Owned; on leased land | |||
Bayswater North, Australia | Chemetall Surface Treatment | Production of surface treatment chemicals for general industry, aerospace, and other pre-treatment technologies | Owned | |||
Bitterfeld, Germany | Refining Solutions | Refinery catalyst regeneration, rejuvenation, and sulfiding | Owned by Eurecat S.A., a joint venture owned 50% by each of IFP Investissements and us | |||
Blackman Township, Michigan | Chemetall Surface Treatment | Production of surface treatment chemicals for general industry, automotive, and other pre-treatment technologies | Owned | |||
Boksburg, South Africa | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Cambridge, U.K. | Performance Chemicals | Production of performance catalysts | Leased | |||
Canovelles, Spain | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
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Location | Business Segment in 2015 | Principal Use | Owned/Leased | |||
Cayirova-Kocaeli, Turkey | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Changchun, China | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Leased by Changchun Chemetall Chemicals Company Limited, a joint venture owned 57% by us and 43% by Changchun Yongchan Petro Chemicals Company Limited | |||
Chennai, India | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Chongqing, China | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Leased by Chongqing Chemetall Surface Treatment Company Limited, a joint venture owned 55% by us and 45% by Zhongtian Environmental Protection (Group) Company Limited | |||
El Marqués, Querétaro, Mexico | Chemetall Surface Treatment | Production of surface treatment chemicals for aerospace, automotive, other pre-treatment technologies | Leased | |||
Foshan, China | Chemetall Surface Treatment | Production of surface treatment chemicals for general industry and automotive | Leased by Foshan Chemetall Surface Treatment Company, a joint venture owned 57% by us and 43% by Changchun Yongchan Petro Chemicals Company Limited | |||
Giussano, Italy | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Greenbushes, Australia | Performance Chemicals | Production of lithium spodumene minerals and lithium concentrate | Owned by Windfield Holdings Pty Ltd, a joint venture in which we own 49%, and Sichuan Tianqi Lithium Industries Inc which owns the remaining interest | |||
Jubail, Saudi Arabia | Performance Chemicals | Manufacturing and marketing of organometallics | Owned; Albemarle Netherlands BV and Saudi Specialty Chemicals Company (a SABIC affiliate) each owns 50% interest | |||
Jundiai/São Paulo, Brazil | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Kings Mountain, North Carolina | Performance Chemicals | Production of technical and battery grade lithium hydroxide | Owned | |||
La Mirada, California | Chemetall Surface Treatment | Production of surface treatment chemicals for pre-treatment technologies and aerospace | Leased | |||
La Negra, Chile | Performance Chemicals | Production of lithium carbonate and lithium chloride | Owned | |||
Langelsheim, Germany | Performance Chemicals; Chemetall Surface Treatment | Production of butyllithium, lithium chloride, specialty products, lithium hydrides, cesium, special metals, as well as surface treatment chemicals for automotive technologies, other pre-treatment technologies and aerospace (sealants) | Owned | |||
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Location | Business Segment in 2015 | Principal Use | Owned/Leased | |||
Louvain-la-Neuve, Belgium | Refining Solutions; Performance Chemicals; All Other | Regional offices and research and customer technical service activities | Owned | |||
La Voulte, France | Refining Solutions | Refinery catalysts regeneration and treatment, research and development activities | Owned by Eurecat S.A., a joint venture owned 50% by each of IFP Investissements and us | |||
Magnolia, Arkansas | Performance Chemicals | Production of flame retardants, bromine, inorganic bromides, agricultural intermediates and tertiary amines | Owned | |||
McAlester, Oklahoma | Refining Solutions | Refinery catalyst regeneration, rejuvenation, pre-reclaim burn off, as well as specialty zeolites and additives marketing activities | Owned by Eurecat S.A., a joint venture owned 50% by each of IFP Investissements and us | |||
Mobile, Alabama | Performance Chemicals | Production of tin stabilizers | Owned by PMC Group, Inc. which operates the plant for Stannica LLC, a joint venture in which we and PMC Group Inc. each own a 50% interest | |||
Mönchengladbach, Germany | Chemetall Surface Treatment | Production of surface treatment chemicals for general industry | Owned | |||
Nanjing, China | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Leased | |||
New Johnsonville, Tennessee | Performance Chemicals | Production of specialty products | Owned | |||
Niihama, Japan | Refining Solutions | Production of refinery catalysts | Leased by Nippon Ketjen Company Limited, a joint venture owned 50% by each of Sumitomo Metal Mining Company Limited and us | |||
Pasadena, Texas | Performance Chemicals; All Other | Production of aluminum alkyls, alkenyl succinic anhydride, orthoalkylated anilines, and other specialty chemicals | Owned | |||
Pasadena, Texas | Refining Solutions | Production of refinery catalysts, research and development activities | Owned | |||
Pasadena, Texas | Refining Solutions | Refinery catalysts regeneration services | Owned by Eurecat U.S. Incorporated, a joint venture in which we own a 57.5% interest and a consortium of entities in various proportions owns the remaining interest | |||
Pune, India | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Safi, Jordan | Performance Chemicals | Production of bromine and derivatives and flame retardants | Owned and leased by JBC, a joint venture owned 50% by each of Arab Potash Company Limited and us | |||
Salar de Atacama, Chile | Performance Chemicals | Production of lithium brine and potash | Owned; however ownership will revert to the Chilean government once we have sold all remaining amounts under our contract with the Chilean government pursuant to which we obtain lithium brine in Chile | |||
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Location | Business Segment in 2015 | Principal Use | Owned/Leased | |||
Santa Cruz, Brazil | Refining Solutions | Production of catalysts, research and product development activities | Owned by Fábrica Carioca de Catalisadores S.A, a joint venture owned 50% by each of Petrobras Química S.A.—PETROQUISA and us | |||
Sens, France | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Owned | |||
Shanghai, China | Chemetall Surface Treatment | Production of surface treatment chemicals for automotive and other pre-treatment technologies | Leased | |||
Silver Peak, Nevada | Performance Chemicals | Production of lithium-carbonate | Owned | |||
Singapore, Singapore | Chemetall Surface Treatment | Production of surface treatment chemicals for aerospace and other pre-treatment technologies | Leased | |||
Soissons, France | Chemetall Surface Treatment | Production of surface treatment chemicals for aerospace industry | Owned | |||
South Haven, Michigan | All Other | Production of custom fine chemistry products including pharmaceutical actives | Owned | |||
Taichung, Taiwan | Performance Chemicals | Production of butyllithium | Owned | |||
Takaishi City, Osaka, Japan | Performance Chemicals | Production of aluminum alkyls | Owned by Nippon Aluminum Alkys, a joint venture owned 50% by each of Mitsui Chemicals, Inc. and us | |||
Twinsburg, Ohio | Performance Chemicals | Production of bromine-activated carbon | Leased | |||
Tyrone, Pennsylvania | All Other | Production of custom fine chemistry products, agricultural intermediates, performance polymer products and research and development activities | Owned | |||
Willstatt, Germany | Chemetall Surface Treatment | Production of surface treatment chemicals for coil coating applications | Leased | |||
Yeosu, South Korea | Performance Chemicals | Research and product development activities/small scale production of catalysts and catalyst components | Owned | |||
Item 3. | Legal Proceedings. |
On February 19, 2015, Verition Multi-Strategy Master Fund Ltd and Verition Partners Master Fund Ltd, who collectively owned approximately 882,000 shares of Rockwood common stock immediately prior to the Merger, commenced an action in the Delaware Chancery Court seeking appraisal of their shares of Rockwood common stock pursuant to Delaware General Corporation Law § 262. These shareholders exercised their right not to receive the Merger consideration which was comprised of (i) $50.65 in cash, without interest, and (ii) 0.4803 of a share of Albemarle common stock, for each share of Rockwood common stock owned by such shareholders. Following the Merger, these shareholders ceased to have any rights with respect to their Rockwood shares, except for their rights to seek an appraisal of the cash value of their Rockwood shares under Delaware law. On March 16, 2015, Albemarle, on behalf of Rockwood, filed an Answer and Verified List in response to the appraisal petition. On November 2, 2015, the court granted the parties’ jointly stipulated amended scheduling order, which set forth dates for fact and expert discovery, as well as trial. On December 21, 2015, the parties entered into a Settlement Agreement and Release to resolve the matter, and on January 11, 2016, the Court dismissed the matter with prejudice.
In addition, we are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.
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Item 4. | Mine Safety Disclosures. |
Not applicable.
Executive Officers of the Registrant.
The names, ages and biographies of our executive officers, as of February 17, 2016, are set forth below. The term of office of each officer is until the meeting of the Board of Directors following the next annual shareholders’ meeting (May 10, 2016).
Name | Age | Position | ||
Luther C. Kissam IV | 51 | President, Chief Executive Officer and Director | ||
Matthew K. Juneau | 55 | Senior Vice President, Corporate Strategy and Investor Relations | ||
Susan Kelliher | 49 | Senior Vice President, Human Resources | ||
Karen G. Narwold | 56 | Senior Vice President, General Counsel, Corporate and Government Affairs, Corporate Secretary | ||
Scott A. Tozier | 50 | Senior Vice President, Chief Financial Officer | ||
Donald J. LaBauve, Jr. | 49 | Vice President, Corporate Controller, Chief Accounting Officer | ||
Luther C. Kissam IV was elected to our Board of Directors effective November 2011, as Chief Executive Officer effective September 2011 and as our President effective May 2013. Previously, Mr. Kissam served as President from March 2010 until March 2012, Executive Vice President, Manufacturing, Law and HS&E from May 2009 until March 2010, and as Senior Vice President, Manufacturing and Law and Corporate Secretary from January 2008 until May 2009. Mr. Kissam joined us in October 2003 and served as Vice President, General Counsel and Corporate Secretary from that time until December 2005, when he was promoted to Senior Vice President, General Counsel and Corporate Secretary. Before joining us, Mr. Kissam served as Vice President, General Counsel and Secretary of Merisant Company (manufacturer and marketer of sweetener and consumer food products), having previously served as Associate General Counsel of Monsanto Company (provider of agricultural products and solutions).
Matthew K. Juneau was elected as our Senior Vice President, Corporate Strategy and Investor Relations effective May 2015. Previously, Mr. Juneau served as Senior Vice President, President Performance Chemicals since December 2013, Vice President, Polymer Solutions since March 2012, Vice President, Global Sales and Services from May 2009 to February 2012, and prior to that as Division Vice President of our performance chemicals business in the Fine Chemistry division since January 2007. Prior to that, Mr. Juneau held various positions of increasing responsibility in research and development and business management with us including Managing Director of our European operations from January 2003 until December 2007. Mr. Juneau joined us as a chemical engineer in June 1982.
Susan Kelliher joined us in March of 2012, as Senior Vice President, Human Resources. Ms. Kelliher has over twenty years of human resources experience, having most recently served at Hewlett Packard as Vice President, Human Resources—Global Sales and Enterprise Marketing from April 2010 to February 2012, and as Vice President, Human Resources—Imaging and Printing Group from September 2007 to April 2010. Prior to joining Hewlett Packard, she was the Vice President of Human Resources for Cymer, Inc., the world’s leading supplier of deep ultraviolet illumination sources. Prior to that, Ms. Kelliher served in various executive and managerial human resources positions at The Home Depot, Inc., Raytheon Company, YUM! Brands’ Pizza Hut division, beginning her career at Mobil Oil.
Karen G. Narwold joined us in September of 2010 and currently serves as Senior Vice President, General Counsel, Corporate and Government Affairs, Corporate Secretary. Ms. Narwold has over 25 years of legal, management and business experience with global industrial and chemical companies. After five years in private practice, she served as Vice President, General Counsel, Human Resources and Secretary of GrafTech International Ltd., a global graphite and carbon manufacturer and former subsidiary of Union Carbide. She then served as Vice President and Strategic Counsel of Barzel Industries, a North American steel processor and distributor. Ms. Narwold resigned from Barzel in November 2009, after Barzel reached an agreement to sell substantially all of its assets in a planned transaction that was consummated in a sale pursuant to Section 363 of the U.S. Bankruptcy Code. Prior to joining Albemarle, Ms. Narwold served as Special Counsel with Kelley Drye & Warren LLP and with Symmetry Advisors where she worked in the areas of strategic, financial and capital structure planning and restructuring for public and private companies.
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Albemarle Corporation and Subsidiaries | ||
Scott A. Tozier was elected as our Senior Vice President and Chief Financial Officer effective January 2011. Mr. Tozier also served as our Chief Accounting Officer from January 2013 until February 2014. Mr. Tozier has over 25 years of diversified international financial management experience. Following four years of assurance services with the international firm Ernst & Young, LLP, Mr. Tozier joined Honeywell International, Inc., where his 16 year career spanned senior financial positions in the U.S., Australia and Europe. His roles of increasing responsibilities included management of financial planning, analysis and reporting, global credit and treasury services and Chief Financial Officer of Honeywell’s Transportation Systems, Turbo Technologies and Building Solutions divisions. Most recently, Mr. Tozier served as Vice President of Finance, Operations and Transformation of Honeywell International, Inc.
Donald J. LaBauve Jr. was elected Vice President, Corporate Controller effective February 2013, and Chief Accounting Officer effective February 2014, after having previously served as Vice President, Finance - Business Operations since April 2009. Mr. LaBauve served as Chief Financial Officer, Fine Chemistry from April 2007 until April 2009, and prior to that time held the role of Controller, Polymer Solutions from January 2006 through March 2007. Since joining the Company as Ethyl Corporation in April 1990, Mr. LaBauve has held various staff and leadership positions of increasing responsibility within the finance function, including an assignment to our European headquarters in Belgium in April 2000 where he held the regional finance leadership role from July 2002 through June 2005.
PART II
Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “ALB.” The following table sets forth on a per share basis the high and low sales prices for our common stock for the periods indicated as reported on the NYSE composite transactions reporting system and the dividends declared per share on our common stock.
Common Stock Price Range | Dividends Declared Per Share of Common Stock | ||||||||||
High | Low | ||||||||||
2014 | |||||||||||
First Quarter | $ | 67.31 | $ | 60.92 | $ | 0.275 | |||||
Second Quarter | $ | 72.69 | $ | 64.55 | $ | 0.275 | |||||
Third Quarter | $ | 76.28 | $ | 58.37 | $ | 0.275 | |||||
Fourth Quarter | $ | 63.38 | $ | 51.35 | $ | 0.275 | |||||
2015 | |||||||||||
First Quarter | $ | 62.23 | $ | 46.78 | $ | 0.29 | |||||
Second Quarter | $ | 64.99 | $ | 52.23 | $ | 0.29 | |||||
Third Quarter | $ | 55.83 | $ | 41.37 | $ | 0.29 | |||||
Fourth Quarter | $ | 57.99 | $ | 44.10 | $ | 0.29 | |||||
There were 112,219,351 shares of common stock held by 2,789 shareholders of record as of December 31, 2015. On February 26, 2016, we declared a dividend of $0.305 per share of common stock, payable April 1, 2016.
The information required by Item 201(d) of Regulation S-K is contained in our definitive Proxy Statement for our 2016 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act, or the Proxy Statement, and is incorporated herein by reference.
Stock Performance Graph
The graph below shows the cumulative total shareholder return assuming the investment of $100 in our common stock on December 31, 2010 and the reinvestment of all dividends thereafter. The information contained in the graph below is furnished and therefore not to be considered “filed” with the SEC, and is not incorporated by reference into any document that incorporates this Annual Report on Form 10-K by reference.
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Item 6. | Selected Financial Data. |
The information for the five years ended December 31, 2015, is contained in the “Five-Year Summary” included in Part IV, Item 15, Exhibit 99.1 and incorporated herein by reference.
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-looking Statements
Some of the information presented in this Annual Report on Form 10-K, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and variations of such words and similar expressions to identify such forward-looking statements.
These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, there can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:
• | changes in economic and business conditions; |
• | changes in financial and operating performance of our major customers and industries and markets served by us; |
• | the timing of orders received from customers; |
• | the gain or loss of significant customers; |
• | competition from other manufacturers; |
• | changes in the demand for our products or the end-user markets in which our products are sold; |
• | limitations or prohibitions on the manufacture and sale of our products; |
• | availability of raw materials; |
• | changes in the cost of raw materials and energy, and our ability to pass through such increases; |
• | changes in our markets in general; |
• | fluctuations in foreign currencies; |
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Albemarle Corporation and Subsidiaries | ||
• | changes in laws and government regulation impacting our operations or our products; |
• | the occurrence of regulatory proceedings, claims or litigation; |
• | the occurrence of cyber-security breaches, terrorist attacks, industrial accidents, natural disasters or climate change; |
• | hazards associated with chemicals manufacturing; |
• | the inability to maintain current levels of product or premises liability insurance or the denial of such coverage; |
• | political unrest affecting the global economy, including adverse effects from terrorism or hostilities; |
• | political instability affecting our manufacturing operations or joint ventures; |
• | changes in accounting standards; |
• | the inability to achieve results from our global manufacturing cost reduction initiatives as well as our ongoing continuous improvement and rationalization programs; |
• | changes in the jurisdictional mix of our earnings and changes in tax laws and rates; |
• | changes in monetary policies, inflation or interest rates that may impact our ability to raise capital or increase our cost of funds, impact the performance of our pension fund investments and increase our pension expense and funding obligations; |
• | volatility and uncertainties in the debt and equity markets; |
• | technology or intellectual property infringement, including cyber-security breaches, and other innovation risks; |
• | decisions we may make in the future; |
• | the ability to successfully execute, operate and integrate acquisitions and divestitures, including the integration of Rockwood’s operations, and realize anticipated synergies and other benefits; and |
• | the other factors detailed from time to time in the reports we file with the SEC. |
We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Annual Report on Form 10-K.
The following is a discussion and analysis of results of operations for the years ended December 31, 2015, 2014 and 2013. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 48.
Overview
We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that meets customer needs across a diverse range of end markets. The end markets we serve include petroleum refining, consumer electronics, energy storage, construction, automotive, steel and aerospace, lubricants, pharmaceuticals, crop protection, household appliances, heating, ventilation, aluminum finishing, food safety and custom chemistry services. We believe that our commercial and geographic diversity, technical expertise, innovative capability, flexible, low-cost global manufacturing base, experienced management team and strategic focus on our core base technologies will enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.
Secular trends favorably impacting demand within the end markets that we serve combined with our diverse product portfolio, broad geographic presence and customer-focused solutions will continue to be key drivers to our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace. We believe our disciplined cost reduction efforts, ongoing productivity improvements and our recently completed acquisition of Rockwood position us well to take advantage of strengthening economic conditions as they occur while softening the negative impact of the current challenging global economic environment.
2015 Highlights
• | In the first quarter, we increased our quarterly dividend for the 21st consecutive year, to $0.29 per share. |
• | On January 12, 2015, we completed the acquisition of Rockwood for a purchase price of approximately $5.7 billion. |
• | In connection with the acquisition of Rockwood, we realigned our organizational structure under three reportable segments: Performance Chemicals, Refining Solutions and Chemetall Surface Treatment. |
• | On February 19, 2015, our Chemetall Surface Treatment segment completed the acquisition of all remaining shares of its Shanghai Chemetall joint venture for a purchase price of $57.6 million. |
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Albemarle Corporation and Subsidiaries | ||
• | We repaid our $325.0 million senior notes which matured on February 1, 2015. |
• | We announced a new leading-edge catalyst that will further strengthen our position in the hydrocracking pre-treat (“HC-PT”) market. Pilot plant testing of the new HC-PT catalyst is complete and commercial sales have begun. |
• | On May 1, 2015, our Chemetall Surface Treatment segment completed the acquisition of the aluminum finishing business of Chemal GmbH & Co. KG (“Chemal GmbH”), based in Hamm, Germany. Cash paid in connection with this acquisition was approximately $2.2 million. |
• | We announced the start of commissioning activities associated with our new, state-of-the-art lithium carbonate production plant located at our La Negra site in northern Chile. We believe the 20,000 MT plant will help enable the Company to meet the accelerating demand for lithium. |
• | We announced our intent to transfer the production of n-Butyllithium from our facility in New Johnsonville, Tennessee, to existing plants in Germany and Taiwan. The transfer process is expected to be completed in the first quarter of 2016. The New Johnsonville facility will continue to manufacture some specialty lithium products and will support blending operations for customers in North America. |
• | We announced that we will relocate our corporate headquarters and Performance Chemicals business from Baton Rouge, LA to Charlotte, NC. In addition, we will relocate Baton Rouge employees in our Refining Solutions business to our existing Clear Lake, TX office. Approximately 120 employees will be relocated to Charlotte or Clear Lake, with the majority of the relocations expected to take place in June 2016. |
• | On October 15, 2015, we redeemed all of the outstanding 4.625% senior notes issued by our wholly-owned subsidiary, Rockwood Specialties Group, Inc., at a redemption price of 103.469% of the principal amount of $1.25 billion, plus accrued and unpaid interest to the redemption date. The 4.625% senior notes were repaid with proceeds from a new term loan credit facility, comprised of a 364-day term loan facility in an aggregate principal amount of $300 million and a five-year term loan facility in an aggregate principal amount of $950 million. |
• | We announced our intention to add up to 50,000 MT of mineral conversion production capacity to significantly boost battery grade lithium production to meet the growing needs of the energy storage market, in particular for customers in the global transportation industry utilizing lithium ion battery technology. Albemarle has commenced feasibility studies and is evaluating potential sites. The plant is expected to be operational in 2020. |
• | We announced the first commercial application of our AlkyStarTM catalyst technology in Shandong, China. Our zeolite-based AlkyStarTM catalyst successfully produced high-quality alkylate after start-up of the world’s first solid acid catalyst alkylation unit. |
• | On November 5, 2015, we signed a definitive agreement to sell our Tribotecc metal sulfides business to Treibacher Industrie AG. On January 4, 2016, the Company closed the sale of this business. Included in the transaction were sites in Vienna and Arnoldstein, Austria, and Tribotecc’s proprietary sulfide syntheses process. We received net proceeds of approximately $137 million in the first quarter of 2016 from the sale of this business. |
• | On December 16, 2015, the Company signed a definitive agreement to sell its minerals-based flame retardants and specialty chemicals businesses to Huber Engineered Materials, a division of J.M. Huber Corporation. The transaction includes Albemarle’s Martinswerk GmbH subsidiary and manufacturing facility located in Bergheim, Germany, and Albemarle’s 50% ownership interest in Magnifin Magnesiaprodukte GmbH, a joint-venture with Radex Heraklith Industriebeteiligung AG at Breitenau, Austria. On February 1, 2016, the Company closed the sale of these businesses and received net proceeds of approximately $187 million. |
• | On December 23, 2015, we paid approximately $4.8 million in connection with the acquisition of the remaining noncontrolling interests’ share of Nanjing Chemetall Surface Technologies Co., Ltd. |
• | We achieved earnings from continuing operations of $360.1 million during 2015 as compared to $230.4 million for 2014. Our operating results contributed $360.7 million to cash flows from operations in 2015. Earnings from continuing operations for 2015 includes pension and other postretirement benefit (“OPEB”) actuarial gains of $27.8 million after income taxes, compared to pension and OPEB actuarial losses of $83.3 million after income taxes in 2014. |
Outlook
On October 26, 2015, we announced that effective January 1, 2016, Performance Chemicals will be split into two separate reportable segments: (1) Bromine Specialties, and (2) Lithium and Advanced Materials, which will include Performance Catalyst Solutions and Curatives. Each unit will have a dedicated team of sales, product management, research & development, process technology, manufacturing, sourcing, sales and operations planning and customer service groups and will have full accountability for improving execution through greater asset and market focus, agility and responsiveness. We expect this change to provide further clarity into the performance of each business.
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The current global business environment presents a diverse set of opportunities and challenges in the markets we serve, from slow and uneven global growth, currency exchange volatility, significantly lower crude oil prices, a dynamic pricing environment in bromine derivatives and an ever-changing landscape in electronics, to the continuous need for cutting edge catalysts and technology by our refinery customers, diverse energy storage needs including exciting opportunities in electric vehicles, and increasingly stringent environmental standards. Amidst these dynamics, we believe our business fundamentals are sound and that we are strategically well-positioned as we remain focused on increasing sales volumes, significant deleveraging following our acquisition of Rockwood, optimizing and improving the value of our portfolio through pricing and product development, managing costs and delivering value to our customers. We believe that our businesses remain positioned to capitalize on new business opportunities and long-term trends driving growth within our end markets and to respond quickly to improved economic conditions. Additionally, we are on track to exceed our original expectations regarding synergies from the acquisition of the Rockwood businesses earlier in the year.
Through 2015, our operations were managed and reported under three reportable segments: Performance Chemicals, Refining Solutions and Chemetall Surface Treatment. Financial results and discussion about our segments included in this Annual Report on Form 10-K are organized according to these categories except where noted.
Performance Chemicals: We expect 2016 to be a challenging year for Bromine sales and profitability growth due to an expected decline in demand of clear brine fluids used in offshore drilling projects as well as the expiration of a methyl bromide supply agreement at the end of 2015 that was not replaced. Through working capital discipline and strong controls on costs, we expect to generate healthy cash flows in the Bromine business despite these challenges.
For Lithium and Advanced Materials, we expect continued strong growth in 2016 led by demand in battery grade applications and continued price improvement in Lithium. Performance Catalyst Solutions experienced strong growth in 2015 due market demand in general and due to certain competitor outages, and we expect to maintain a similar level of profitability in 2016.
We believe that the combination of solid, long-term business fundamentals, with our strong cost position, product innovations and effective management of raw material inventory inflation will enable us to manage our business through end market challenges and to capitalize on opportunities that are expected with favorable market trends in select end markets and with a more evenly sustained economic recovery.
On a long-term basis for Bromine, we continue to believe that improving global standards of living, widespread digitization, increasing demand for data management capacity and the potential for increasingly stringent fire safety regulations in developing markets are likely to drive continued demand for fire safety products. Demand for drilling completion fluids in 2015 held up better than expected, but is likely to still be impacted negatively in the short term as a result of sustained lower oil prices impacting offshore drilling projects around the world. Longer term, absent an increase in regulatory pressure on offshore drilling, we would expect this business to resume a solid growth trajectory once oil prices recover from recent levels as we expect that deep water drilling will continue to increase around the world. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. We believe the global supply/demand gap will tighten as demand for existing and possible new uses of bromine expands over time.
On a long-term basis for Lithium and Advanced Materials, we believe that demand for lithium will continue to grow as new applications for lithium power continue to be developed and the use of Plug-in Hybrid Electric Vehicles and Battery Electric Vehicles escalates. In addition, we expect growth in Performance Catalyst Solutions to come from growing global demand for plastics driven by rising standards of living and infrastructure spending, particularly in Asia and the Middle East.
Refining Solutions: 2015 net sales were down 14% and Adjusted EBITDA was down 23% due largely to declines in clean fuels technology sales volumes slightly offset by solid growth in heavy oil upgrading volumes. In 2016, despite some near-term concerns about how the price of oil will impact the crude slate used by refineries and the resulting demand for catalysts, we expect to see continued, sustained high level performance from heavy oil upgrading as well as improvement in clean fuels technology results due to increased change outs by refiners and an improved product mix, although certain national oil companies, among others, are expected to look for ways to delay catalysts change outs due to the current oil economic environment.
On a longer term basis, we believe increased global demand for transportation fuels and implementation of more stringent fuel quality requirements will drive growth in our Refining Solutions business. Delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry, and we believe our technologies continue to provide significant performance and financial benefits to refiners challenged to meet tighter regulations around the world, those managing new contaminants present in North America tight oil, and those in the Middle
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Albemarle Corporation and Subsidiaries | ||
East and Asia seeking to use heavier feedstock while pushing for higher propylene yields. While lower oil prices may impact the overall crude slate for a period of time, longer term, we believe that the global crude supply will get heavier and more sour, trends that bode well for catalysts demand. Given this and based on our technology, current production capacities and expected growth in end market demand, we believe that we remain well-positioned for the future.
Chemetall Surface Treatment: Demand for surface treatment products generally follows the activity levels of metal processing manufacturers, including the automotive, steel and aerospace industries, as well as products sold to general industrial markets, including heavy equipment, household appliances, manufacturing, heating, ventilation and aluminum finishing. We believe that our strong customer relationships, service, and our geographic and end market diversity coupled with the growth coming from recently completed acquisitions, will lead to continued growth for 2016.
On a longer term basis, we expect to continue to generate growth from our focus on new product development, improving process technologies, expanding our customer base, and broadening our technology capabilities in existing and new markets through internal research and development and bolt-on acquisitions.
All Other: In 2015, we announced our intention to pursue strategic alternatives for several businesses: minerals-based flame retardants and specialty chemicals, fine chemistry services and metal sulfides, which together comprise the “All Other” category. We closed on the sale of the metal sulfides business on January 4, 2016 and we closed on the sale of the minerals-based flame retardants and specialty chemicals business on February 1, 2016.
Corporate: In the first quarter of 2016, we increased our quarterly dividend rate to $0.305 per share. We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2016 to be approximately 23.0%; however, our rate will vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in the U.S. and other tax jurisdictions.
Actuarial gains and losses related to our defined benefit pension and OPEB plan obligations are reflected in Corporate as a component of non-operating pension and OPEB plan costs under mark-to-market accounting. Results for the year ended December 31, 2015 include an actuarial gain of $38.9 million ($27.8 million after income taxes), as compared to a loss of $130.8 million ($83.3 million after income taxes) for the year ended December 31, 2014.
We remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint. Additional information regarding our products, markets and financial performance is provided at our web site, www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.
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Results of Operations
The following data and discussion provides an analysis of certain significant factors affecting our results of operations during the periods included in the accompanying consolidated statements of income.
Selected Financial Data | Year Ended December 31, | Percentage Change | |||||||||||||||
2015 | 2014 | 2013 | 2015 vs. 2014 | 2014 vs. 2013 | |||||||||||||
(In thousands, except percentages and per share amounts) | |||||||||||||||||
NET SALES | $ | 3,651,335 | $ | 2,445,548 | $ | 2,394,270 | 49 | % | 2 | % | |||||||
Cost of goods sold | 2,454,463 | 1,674,700 | 1,543,799 | 47 | % | 8 | % | ||||||||||
GROSS PROFIT | 1,196,872 | 770,848 | 850,471 | 55 | % | (9 | )% | ||||||||||
GROSS PROFIT MARGIN | 32.8 | % | 31.5 | % | 35.5 | % | |||||||||||
Selling, general and administrative expenses | 512,274 | 355,135 | 158,189 | 44 | % | 125 | % | ||||||||||
Research and development expenses | 102,871 | 88,310 | 82,246 | 16 | % | 7 | % | ||||||||||
Restructuring and other, net | (6,804 | ) | 25,947 | 33,361 | (126 | )% | (22 | )% | |||||||||
Acquisition and integration related costs | 146,096 | 30,158 | — | 384 | % | * | |||||||||||
OPERATING PROFIT | 442,435 | 271,298 | 576,675 | 63 | % | (53 | )% | ||||||||||
OPERATING PROFIT MARGIN | 12.1 | % | 11.1 | % | 24.1 | % | |||||||||||
Interest and financing expenses | (132,722 | ) | (41,358 | ) | (31,559 | ) | 221 | % | 31 | % | |||||||
Other income (expenses), net | 48,474 | (16,761 | ) | (6,674 | ) | * | 151 | % | |||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS | 358,187 | 213,179 | 538,442 | 68 | % | (60 | )% | ||||||||||
Income tax expense | 29,122 | 18,484 | 134,445 | 58 | % | (86 | )% | ||||||||||
Effective tax rate | 8.1 | % | 8.7 | % | 25.0 | % | |||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS | 329,065 | 194,695 | 403,997 | 69 | % | (52 | )% | ||||||||||
Equity in net income of unconsolidated investments (net of tax) | 30,999 | 35,742 | 31,729 | (13 | )% | 13 | % | ||||||||||
NET INCOME FROM CONTINUING OPERATIONS | 360,064 | 230,437 | 435,726 | 56 | % | (47 | )% | ||||||||||
(Loss) income from discontinued operations (net of tax) | — | (69,531 | ) | 4,108 | (100 | )% | * | ||||||||||
NET INCOME | 360,064 | 160,906 | 439,834 | 124 | % | (63 | )% | ||||||||||
Net income attributable to noncontrolling interests | (25,158 | ) | (27,590 | ) | (26,663 | ) | (9 | )% | 3 | % | |||||||
NET INCOME ATTRIBUTABLE TO ALBEMARLE CORPORATION | $ | 334,906 | $ | 133,316 | $ | 413,171 | 151 | % | (68 | )% | |||||||
NET INCOME FROM CONTINUING OPERATIONS AS A PERCENTAGE OF NET SALES | 9.9 | % | 9.4 | % | 18.2 | % | |||||||||||
Basic earnings (loss) per share: | |||||||||||||||||
Continuing operations | $ | 3.01 | $ | 2.57 | $ | 4.88 | 17 | % | (47 | )% | |||||||
Discontinued operations | — | (0.88 | ) | 0.05 | (100 | )% | * | ||||||||||
$ | 3.01 | $ | 1.69 | $ | 4.93 | 78 | % | (66 | )% | ||||||||
Diluted earnings (loss) per share: | |||||||||||||||||
Continuing operations | $ | 3.00 | $ | 2.57 | $ | 4.85 | 17 | % | (47 | )% | |||||||
Discontinued operations | — | (0.88 | ) | 0.05 | (100 | )% | * | ||||||||||
$ | 3.00 | $ | 1.69 | $ | 4.90 | 78 | % | (66 | )% | ||||||||
* Percentage calculation is not meaningful.
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Albemarle Corporation and Subsidiaries | ||
Comparison of 2015 to 2014
Net Sales
For the year ended December 31, 2015, we recorded net sales of $3.65 billion, a 49% increase compared to net sales of $2.45 billion for the corresponding period of 2014. Approximately $1.4 billion of the increase was attributable to the impact of the Rockwood acquisition. Excluding the acquisition of Rockwood, net sales decreased by $210.1 million primarily due to $106.5 million of unfavorable sales volumes, $87.7 million of unfavorable impacts from currency translation and $15.8 million of unfavorable price impacts due to market conditions and portfolio mix. The unfavorable sales volumes were due to lower Clean Fuels Technologies, Fine Chemistry Services, and Bromine volumes partially offset by increased Heavy Oil Upgrading and PCS sales volumes. The unfavorable price impacts were primarily due to lower Refining Solutions, Fine Chemistry Services, and PCS prices partly offset by favorable price impacts for Bromine.
Gross Profit
For the year ended December 31, 2015, our gross profit increased $426.0 million, or 55%, from the corresponding 2014 period. Gross profit for 2015 includes $1.4 million of pension and OPEB benefits (including mark-to-market actuarial gains of $2.0 million) allocated to cost of good sold, as compared to $36.5 million of pension and OPEB costs (including mark-to-market actuarial losses of $36.4 million) allocated to cost of goods sold in 2014. Excluding the $37.9 million increase in gross profit related to pension and OPEB plans, gross profit increased by $388.1 million due to $470.9 million of gross profit attributable to the performance of the acquired Rockwood business, which includes a $75.9 million charge for the utilization of the inventory markup recorded as part of purchase accounting for the acquisition, partially offset by an $82.8 million decrease in gross profit due primarily to unfavorable impacts from currency translation, unfavorable price impacts due to market conditions and portfolio mix and lower overall sales volumes. Overall, these factors contributed to a higher gross profit margin for the year ended December 31, 2015 of 32.8%, up from 31.5% in the corresponding period of 2014. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, our gross profit margin was 32.7% in 2015 and 33.0% in 2014.
The mark-to-market actuarial loss in 2014 is primarily attributable to: (a) a decrease in the weighted-average discount rate for our pension plans to 4.03% from 5.00% to reflect market conditions as of the December 31, 2014 measurement date, and (b) changes in mortality assumptions, and to a lesser extent, other demographic assumptions related to our pension plans. The mark-to-market actuarial loss in 2014 was partially offset by a higher return on pension plan assets in 2014 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. pension plan assets was 8.87% versus an expected return of 6.91%.
Selling, General and Administrative Expenses
For the year ended December 31, 2015, our selling, general and administrative (“SG&A”) expenses increased $157.1 million, or 44%, compared to the year ended December 31, 2014. SG&A expenses for 2015 includes approximately $37.4 million of pension and OPEB benefits (including mark-to-market actuarial gains of $36.9 million) allocated to SG&A, as compared to $97.1 million of pension and OPEB costs (including mark-to-market actuarial losses of $94.5 million) allocated to SG&A in 2014. Excluding the $134.5 million decrease in SG&A related to pension and OPEB plans, SG&A increased by $291.6 million, or 13.0%, due to the acquisition of Rockwood, net of realized synergies. As a percentage of net sales, SG&A expenses were 14.0% in 2015, compared to 14.5% in 2014. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, SG&A expenses as a percentage of net sales were 15.0% in 2015 and 10.7% in 2014.
The mark-to-market actuarial gain in 2015 is primarily attributable to: (a) an increase in the weighted-average discount rate to 4.67% from 4.18% for our U.S. pension plans and to 2.89% from 2.34% for our foreign pension plans to reflect market conditions as of the December 31, 2015 measurement date, and (b) changes in mortality assumptions. The mark-to-market actuarial gain in 2015 was partially offset by a lower return on pension plan assets in 2015 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. and foreign pension plan assets was (2.74)% versus an expected return of 6.85%. The mark-to-market actuarial loss in 2014 resulted from the factors as discussed in Gross Profit above.
Research and Development Expenses
For the year ended December 31, 2015, our R&D expenses increased $14.6 million, or 16%, from the year ended December 31, 2014, primarily due to the acquisition of Rockwood. As a percentage of net sales, R&D expenses were 2.8% in 2015, compared to 3.6% in 2014.
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Albemarle Corporation and Subsidiaries | ||
Restructuring and Other, Net
Included in restructuring and other, net, for the year ended December 31, 2015 is a gain of $6.8 million ($5.4 million after income taxes) recognized upon the sale of land in Avonmouth, U.K., which was utilized by the phosphorus flame retardants business we exited in 2012. Restructuring and other, net, of $25.9 million for the year ended December 31, 2014 includes the following items:
(a) | Estimated costs of approximately $20.5 million ($13.6 million after income taxes) in connection with action we initiated to reduce the high cost supply capacity of certain aluminum alkyl products, primarily through the termination of a third party manufacturing contract. |
(b) | An impairment charge of $3.0 million ($1.9 million after income taxes) for certain capital project costs also related to aluminum alkyls capacity which we do not expect to recover. |
(c) | Other net charges of $2.4 million ($1.4 million after income taxes), mainly in connection with a write-off of certain multi-product facility project costs that we do not expect to recover in future periods. |
Acquisition and Integration Related Costs
The year ended December 31, 2015 includes $137.7 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services and advisory fees, costs to achieve synergies, relocation costs, and other integration costs) and $8.4 million of costs in connection with other significant projects. The year ended December 31, 2014 includes $23.6 million of acquisition and integration related costs directly related to the acquisition of Rockwood and $6.6 million of costs in connection with other significant projects.
Interest and Financing Expenses
Interest and financing expenses for the year ended December 31, 2015 increased $91.4 million to $132.7 million from the corresponding 2014 period, due mainly to higher borrowing levels in connection with the acquisition of Rockwood. Included in 2015 is a charge of approximately $5.4 million related to the early extinguishment of the 4.625% senior notes we assumed from Rockwood.
Other Income (Expenses), Net
Other income (expenses), net, for the year ended December 31, 2015 was $48.5 million versus ($16.8) million for the corresponding 2014 period. The change was due mainly to $54.7 million of favorable foreign currency translation gains and a $12.3 million reduction in amortization of bridge facility fees and other financing fees related to the acquisition of Rockwood. The foreign currency gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency.
Income Tax Expense
The effective income tax rate for 2015 was 8.1% compared to 8.7% for 2014. Our effective income tax rate differs from the U.S. federal statutory income tax rates in the comparative periods mainly due to the impact of earnings from outside the U.S, including net impacts on the release of the liability from earnings that were not indefinitely invested and were repatriated from legacy Rockwood. Our effective tax rate for 2015 was affected by discrete net tax benefit items of $41.6 million related mainly to the release of prior year uncertain tax positions associated with lapses in statutes of limitations and audit closures, items associated with U.S. provision to return adjustments, and an OPEB plan termination gain recorded in the period. Our effective income tax rate in 2014 was affected by tax benefits of $74.2 million related to restructuring charges, a pension plan actuarial loss and the release of reserves related principally to the expiration of the U.S. federal statute of limitations. See Note 20, “Income Taxes” to our consolidated financial statements included in Part II, Item 8 of this report for a reconciliation of the U.S. federal statutory income tax rate to our effective rate for 2015 and 2014.
Equity in Net Income of Unconsolidated Investments
Equity in net income of unconsolidated investments was $31.0 million for the year ended December 31, 2015 compared to $35.7 million in the same period last year. The current year equity in net income of unconsolidated investments includes a $27.1 million charge for utilization of fair value adjustments to inventories as well as a $2.0 million impairment charge related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Excluding theses charges, equity in net income of unconsolidated investments increased by $24.4 million primarily due to equity income derived from unconsolidated investments we acquired from Rockwood (Performance Chemicals and Chemetall Surface Treatment segments), partially offset
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Albemarle Corporation and Subsidiaries | ||
by lower equity income reported by our Refining Solutions segment joint venture Nippon Ketjen Company Limited primarily due to lower sales volumes.
Loss from Discontinued Operations
Loss from discontinued operations, after income taxes, of $69.5 million for the year ended December 31, 2014 includes a pre-tax charge of $85.5 million ($65.7 million after income taxes) related to the sale of our antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc., which closed on September 1, 2014. This charge represented the difference between the carrying value of the related assets and their fair value as determined by the sales price less estimated costs to sell, and was primarily attributable to the write-off of goodwill, intangibles and long-lived assets, net of cumulative foreign currency translation gains of $17.8 million.
Net Income Attributable to Noncontrolling Interests
For the year ended December 31, 2015, net income attributable to noncontrolling interests was $25.2 million compared to $27.6 million in the same period last year. This decrease of $2.4 million was due primarily to changes in consolidated income related to our Jordanian joint venture.
Net Income Attributable to Albemarle Corporation
Net income attributable to Albemarle Corporation increased to $334.9 million for the year ended December 31, 2015, from $133.3 million for the corresponding period of 2014. The total estimated impact of the Rockwood acquisition is income of approximately $3.8 million before income taxes, including earnings of the acquiree (as included in Note 2, “Acquisitions” to our consolidated financial statements included in Part II, Item 8 of this report), acquisition and integration related costs, interest expense associated with additional borrowings, and other currency transaction gains related to the execution of the closing. Excluding the impact of the Rockwood acquisition, net income increased approximately $197.8 million primarily due to a $144.4 million decrease in pension and OPEB charges versus the prior year, the loss from discontinued operations and restructuring and other charges in the prior year of $69.5 million and $25.9 million, respectively, plus the gain on sale of land of $6.8 million in restructuring and other for the 2015 period, partly offset by unfavorable impacts in operating profit of approximately $48.8 million, including the unfavorable impacts of currency translation.
Other Comprehensive Loss, Net of Tax
Total other comprehensive loss, after income taxes, was $360.8 million in 2015 compared to $178.7 million in 2014. The majority of these amounts are the result of translating our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In 2015, other comprehensive loss from foreign currency translation adjustments was $413.0 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $279 million, the British Pound Sterling of approximately $49 million, the Brazilian Real of approximately $30 million, the Turkish Lira of approximately $10 million, the Korean Won of approximately $7 million, the Chinese Renminbi of approximately $8 million, the South African Rand of approximately $8 million and a net unfavorable variance in various other currencies totaling approximately $23 million (each approximately $5 million or less). Also included in total other comprehensive loss for 2015 is income of $50.9 million in connection with the revaluation of our €700.0 million senior notes which were designated as a hedge of our net investment in foreign operations. In 2014, other comprehensive loss from foreign currency translation adjustments was $168.8 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $124 million, the Chinese Renminbi of approximately $18 million and the Brazilian Real of approximately $13 million. Also included in total other comprehensive loss for 2014 is a realized loss of $21.0 million related to an interest rate swap which settled in the fourth quarter of 2014, and income of $11.4 million in connection with the revaluation of our €700.0 million senior notes and settlement of related foreign currency forward contracts, both of which were designated as a hedge of our net investment in foreign operations.
Segment Information Overview. Summarized financial information concerning our reportable segments is shown in the following tables. Results for 2014 have been recast to reflect the change in segments previously noted and a change in our measure of segment profit or loss to adjusted EBITDA as discussed below. During the first quarter we announced our intention to pursue strategic alternatives for several businesses - mineral flame retardants, fine chemistry services and metal sulfides, which together comprise the “All Other” category. The Corporate category is not considered to be a segment and includes corporate-related items not allocated to the reportable segments. Pension and OPEB service cost (which represents the benefits earned by active employees during the period) and amortization of prior service cost or benefit are allocated to the segments, All Other, and Corporate, whereas the remaining components of pension and OPEB benefits cost or credit (“Non-operating
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Albemarle Corporation and Subsidiaries | ||
pension and OPEB items”) are included in Corporate. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs.
Beginning in 2015, the Company uses earnings before interest, taxes, depreciation and amortization, as adjusted for certain non-recurring or unusual items such as restructuring charges, facility divestiture charges, non-operating pension and OPEB items and other significant non-recurring items (“adjusted EBITDA”), on a segment basis to assess the ongoing performance of the Company’s business segments. Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with, U.S. GAAP. The Company has reported adjusted EBITDA because management believes it provides transparency to investors and enables period-to-period comparability of financial performance. Adjusted EBITDA should not be considered as an alternative to Net income (loss) attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP.
Year Ended December 31, | Percentage Change | ||||||||||||||||
2015 | % | 2014 | % | 2015 vs. 2014 | |||||||||||||
(In thousands, except percentages) | |||||||||||||||||
Net sales: | |||||||||||||||||
Performance Chemicals | $ | 1,610,319 | 44.1 | % | $ | 1,121,645 | 45.9 | % | 44 | % | |||||||
Refining Solutions | 729,261 | 20.0 | % | 852,139 | 34.8 | % | (14 | )% | |||||||||
Chemetall Surface Treatment | 824,906 | 22.6 | % | — | — | % | * | ||||||||||
All Other | 471,434 | 12.9 | % | 471,764 | 19.3 | % | — | % | |||||||||
Corporate | 15,415 | 0.4 | % | — | — | % | * | ||||||||||
Total net sales | $ | 3,651,335 | 100.0 | % | $ | 2,445,548 | 100.0 | % | 49 | % | |||||||
Adjusted EBITDA: | |||||||||||||||||
Performance Chemicals | $ | 535,520 | 55.8 | % | $ | 306,572 | 54.5 | % | 75 | % | |||||||
Refining Solutions | 197,595 | 20.6 | % | 256,485 | 45.6 | % | (23 | )% | |||||||||
Chemetall Surface Treatment | 202,028 | 21.1 | % | — | — | % | * | ||||||||||
All Other | 53,993 | 5.6 | % | 73,973 | 13.2 | % | (27 | )% | |||||||||
Corporate | (29,814 | ) | (3.1 | )% | (74,875 | ) | (13.3 | )% | (60 | )% | |||||||
Total adjusted EBITDA | $ | 959,322 | 100.0 | % | $ | 562,155 | 100.0 | % | 71 | % | |||||||
* Percentage calculation is not meaningful.
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Albemarle Corporation and Subsidiaries | ||
See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, to Net income (loss) attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, (in thousands):
Performance Chemicals | Refining Solutions | Chemetall Surface Treatment | Reportable Segments Total | All Other | Corporate | Consolidated Total | |||||||||||||||||||||
2015 | |||||||||||||||||||||||||||
Adjusted EBITDA | $ | 535,520 | $ | 197,595 | $ | 202,028 | $ | 935,143 | $ | 53,993 | $ | (29,814 | ) | $ | 959,322 | ||||||||||||
Depreciation and amortization | (120,248 | ) | (34,039 | ) | (78,903 | ) | (233,190 | ) | (18,183 | ) | (8,703 | ) | (260,076 | ) | |||||||||||||
Utilization of inventory markup(a) | (79,977 | ) | — | (20,030 | ) | (100,007 | ) | (3,029 | ) | — | (103,036 | ) | |||||||||||||||
Restructuring and other, net | — | — | — | — | — | 6,804 | 6,804 | ||||||||||||||||||||
Acquisition and integration related costs(b) | — | — | — | — | — | (146,096 | ) | (146,096 | ) | ||||||||||||||||||
Interest and financing expenses | — | — | — | — | — | (132,722 | ) | (132,722 | ) | ||||||||||||||||||
Income tax expense | — | — | — | — | — | (29,122 | ) | (29,122 | ) | ||||||||||||||||||
Non-operating pension and OPEB items | — | — | — | — | — | 46,244 | 46,244 | ||||||||||||||||||||
Other(c) | — | (1,971 | ) | — | (1,971 | ) | — | (4,441 | ) | (6,412 | ) | ||||||||||||||||
Net income (loss) attributable to Albemarle Corporation | $ | 335,295 | $ | 161,585 | $ | 103,095 | $ | 599,975 | $ | 32,781 | $ | (297,850 | ) | $ | 334,906 | ||||||||||||
2014 | |||||||||||||||||||||||||||
Adjusted EBITDA | $ | 306,572 | $ | 256,485 | $ | — | $ | 563,057 | $ | 73,973 | $ | (74,875 | ) | $ | 562,155 | ||||||||||||
Depreciation and amortization(d) | (51,707 | ) | (32,670 | ) | — | (84,377 | ) | (13,478 | ) | (2,552 | ) | (100,407 | ) | ||||||||||||||
Restructuring and other, net | — | — | — | — | — | (25,947 | ) | (25,947 | ) | ||||||||||||||||||
Acquisition and integration related costs(b) | — | — | — | — | — | (30,158 | ) | (30,158 | ) | ||||||||||||||||||
Interest and financing expenses | — | — | — | — | — | (41,358 | ) | (41,358 | ) | ||||||||||||||||||
Income tax expense | — | — | — | — | — | (18,484 | ) | (18,484 | ) | ||||||||||||||||||
Loss from discontinued operations (net of tax) | — | — | — | — | — | (69,531 | ) | (69,531 | ) | ||||||||||||||||||
Non-operating pension and OPEB items | — | — | — | — | — | (125,462 | ) | (125,462 | ) | ||||||||||||||||||
Other(e) | — | — | — | — | — | (17,492 | ) | (17,492 | ) | ||||||||||||||||||
Net income (loss) attributable to Albemarle Corporation | $ | 254,865 | $ | 223,815 | $ | — | $ | 478,680 | $ | 60,495 | $ | (405,859 | ) | $ | 133,316 | ||||||||||||
(a) | In connection with the acquisition of Rockwood, the Company valued Rockwood’s existing inventory at fair value as of the Acquisition Closing Date, which resulted in a markup of the underlying net book value of the inventory totaling approximately $103 million. The inventory markup was expensed over the estimated remaining selling period. For the year ended December 31, 2015, $75.9 million was included in Cost of goods sold, and Equity in net income of unconsolidated investments was reduced by $27.1 million, related to the utilization of the inventory markup. |
(b) | See “Acquisition and Integration Related Costs” on page 36 for a description of these costs. |
(c) | Refining Solutions includes an impairment charge of approximately $2.0 million related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Corporate includes approximately $4.4 million of financing-related fees expensed in connection with the acquisition of Rockwood. |
(d) | Excludes discontinued operations. |
(e) | Financing-related fees expensed in connection with the acquisition of Rockwood. |
Performance Chemicals
Performance Chemicals segment net sales for the year ended December 31, 2015 were $1.61 billion, up $488.7 million, or 44%, in comparison to the same period in 2014. The increase was driven mainly by the acquisition of Rockwood, $26.0 million of favorable PCS volumes due to higher demand, and $9.4 million of favorable Bromine price impacts on certain products, partly offset by $21.8 million of unfavorable Bromine volumes on weaker demand and $27.9 million of unfavorable impacts from currency translation, primarily due to the weaker European Union Euro. Adjusted EBITDA for Performance Chemicals was up 75%, or $228.9 million, to $535.5 million for the year ended December 31, 2015, compared to the same period in 2014, with approximately $213.5 million due to the acquisition of Rockwood, $24.6 million in higher PCS sales volumes due to strong demand, and $9.4 million in favorable Bromine pricing impacts due to market conditions, offset partly by $16.1 million of unfavorable impacts of currency translation, primarily due to the weaker European Union Euro.
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Albemarle Corporation and Subsidiaries | ||
Refining Solutions
Refining Solutions segment net sales for the year ended December 31, 2015 were $729.3 million, a decrease of $122.9 million, or 14%, compared to the year ended December 31, 2014. This decrease was predominantly due to $103.5 million of unfavorable Clean Fuels Technology volumes due to customer demand, $15.0 million unfavorable Clean Fuels Technology and Heavy Oil Upgrading pricing impacts due to product and customer mix, and $30.4 million of unfavorable impacts from currency translation, primarily due to the weaker European Union Euro, partially offset by $30.4 million of higher Heavy Oil Upgrading volumes. Refining Solutions adjusted EBITDA decreased 23%, or $58.9 million, to $197.6 million for the year ended December 31, 2015 in comparison to the corresponding period of 2014. This decrease was due primarily to lower overall sales volumes primarily in Clean Fuels Technology due to lower demand, unfavorable pricing and mix due to economic conditions and specific crude feeds, and unfavorable impacts of currency translation, primarily due to the weaker European Union Euro, partially offset by $21.7 million in favorable pricing on raw materials and natural gas.
Chemetall Surface Treatment
Arising from the acquisition of Rockwood, Chemetall Surface Treatment segment net sales and adjusted EBITDA for the year ended December 31, 2015 were $824.9 million, and $202.0 million, respectively.
All Other
All Other net sales for the year ended December 31, 2015 were $471.4 million, a decrease of $0.3 million compared to the year ended December 31, 2014. The decrease was driven mainly by $55.3 million of unfavorable Fine Chemistry Services volumes, and $29.4 million of unfavorable impacts from currency translation impacts, primarily due to the weaker European Union Euro, offset by the acquisition of Rockwood. All Other adjusted EBITDA was down 27%, or $20.0 million, for the year ended December 31, 2015 in comparison to the same period of 2014. This decrease was due primarily to lower overall sales and unfavorable impacts from currency translation, primarily due to the weaker European Union Euro, partially offset by the acquisition of Rockwood.
Corporate
Corporate adjusted EBITDA was a charge of $29.8 million for the year ended December 31, 2015, a decrease of $45.1 million, compared to the year ended December 31, 2014. The change was due mainly to $52.7 million of foreign currency translation gains and achieved synergies partially offset by the acquisition of Rockwood. The foreign translation gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency.
Comparison of 2014 to 2013
Net Sales
For the year ended December 31, 2014, we recorded net sales of $2.45 billion, a 2% increase compared to net sales of $2.39 billion for the corresponding period of 2013. This increase was due primarily to favorable volume impacts of approximately $60.1 million in Refining Solutions, $11.3 million in Minerals and $8.3 million in Performance Chemicals partially offset by unfavorable volume impacts of approximately $27.8 million in Fine Chemistry Services and unfavorable currency impacts of approximately $2.2 million due to a stronger U.S. Dollar as we closed out the year.
Gross Profit
For the year ended December 31, 2014, our gross profit decreased $79.6 million, or 9%, from the corresponding 2013 period. Our gross profit for 2014 was impacted by approximately $36.5 million of pension and OPEB costs (including mark-to-market actuarial losses of $36.4 million) allocated to cost of goods sold, as compared to $42.2 million of pension and OPEB benefits (including mark-to-market actuarial gains of $42.7 million) allocated to cost of goods sold in 2013. Overall, these factors contributed to our gross profit margin of 31.5% for 2014, down from 35.5% in 2013. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, our gross profit margin was 33.0% in 2014 and 33.7% in 2013.
The mark-to-market actuarial loss in 2014 is primarily attributable to: (a) a decrease in the weighted-average discount rate for our pension plans to 4.03% from 5.00% to reflect market conditions as of the December 31, 2014 measurement date, and (b) changes in mortality assumptions, and to a lesser extent, other demographic assumptions related to our pension plans. The mark-to-market actuarial loss in 2014 was partially offset by a higher return on pension plan assets in 2014 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. pension plan assets was 8.87% versus an expected return of 6.91%.
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Albemarle Corporation and Subsidiaries | ||
The mark-to-market actuarial gain in 2013 is primarily attributable to: (a) an increase in the weighted-average discount rate for our pension plans to 5.00% from 4.04% to reflect market conditions as of the December 31, 2013 measurement date; (b) the weighted-average actual return on U.S. pension plan assets of 15.07% was higher than the expected return of 7.25% as a result of overall market and investment portfolio performance; and (c) changes in demographic assumptions related to our pension plans, such as mortality rates, rates of compensation and other factors.
Selling, General and Administrative Expenses
For the year ended December 31, 2014, our SG&A expenses increased $196.9 million, or 125%, compared to the year ended December 31, 2013. This increase was primarily due to unfavorable pension and OPEB items and incentive compensation costs. SG&A expenses for 2014 includes approximately $97.1 million of pension and OPEB costs (including mark-to-market actuarial losses of $94.5 million), as compared to $90.5 million of pension and OPEB benefits (including mark-to-market actuarial gains of $96.3 million) in 2013. The mark-to-market actuarial losses and gains in 2014 and 2013, respectively, resulted from the factors as discussed in Gross Profit above.
As a percentage of net sales, SG&A expenses were 14.5% for the year ended December 31, 2014, compared to 6.6% for the corresponding period in 2013. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, SG&A expenses as a percentage of net sales were 10.7% in 2014 and 10.6% in 2013.
Research and Development Expenses
For the year ended December 31, 2014, our R&D expenses increased $6.1 million, or 7%, from the year ended December 31, 2013, mainly as a result of higher personnel costs and higher spending for outside services. As a percentage of net sales, R&D expenses were 3.6% in 2014, compared to 3.4% in 2013.
Restructuring and Other, Net
Restructuring and other, net, of $25.9 million for the year ended December 31, 2014 includes the following items:
(a) | Estimated costs of approximately $20.5 million ($13.6 million after income taxes) in connection with action we initiated to reduce the high cost supply capacity of certain aluminum alkyl products, primarily through the termination of a third party manufacturing contract. |
(b) | An impairment charge of $3.0 million ($1.9 million after income taxes) for certain capital project costs also related to aluminum alkyls capacity which we do not expect to recover. |
(c) | Other net charges of $2.4 million ($1.4 million after income taxes), mainly in connection with a write-off of certain multi-product facility project costs that we do not expect to recover in future periods. |
In connection with a realignment of our operating segments effective January 1, 2014, in the fourth quarter of 2013, we initiated a workforce reduction plan which resulted in a reduction of approximately 230 employees worldwide. We recorded charges of $33.4 million ($21.9 million after income taxes) during the year ended December 31, 2013 for termination benefits and other costs related to this workforce reduction plan.
Acquisition and Integration Related Costs
The year ended December 31, 2014 includes $23.6 million of acquisition and integration related costs directly related to the acquisition of Rockwood and $6.6 million of costs in connection with other significant projects. Acquisition-related costs incurred during the year ended December 31, 2013 are included in SG&A expenses and were not significant.
Interest and Financing Expenses
Interest and financing expenses for the year ended December 31, 2014 increased $9.8 million to $41.4 million from the corresponding 2013 period, due mainly to higher borrowing levels in connection with the acquisition of Rockwood and decreases in interest capitalized on lower average construction work in progress balances in the 2014 period.
Other Expenses, Net
Other expenses, net, for the year ended December 31, 2014 was $16.8 million versus $6.7 million for the corresponding 2013 period. This increase was due to $16.7 million of amortized bridge facility fees and $1.0 million of other financing fees in the 2014 period related to the acquisition of Rockwood, partially offset by net favorable items of $7.6 million primarily related to favorable currency impacts compared to the corresponding period in 2013 due to more effective management of currency risks.
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Albemarle Corporation and Subsidiaries | ||
Income Tax Expense
The effective income tax rate for 2014 was 8.7% compared to 25.0% for 2013. Our effective income tax rate differs from the U.S. federal statutory income tax rates in the comparative periods mainly due to the impact of earnings from outside the U.S. Our effective income tax rate in 2014 was affected by tax benefits of $74.2 million related to restructuring charges, a pension plan actuarial loss and the release of reserves related principally to the expiration of the U.S. federal statute of limitations. See Note 20, “Income Taxes” to our consolidated financial statements included in Part II, Item 8 of this report for a reconciliation of the U.S. federal statutory income tax rate to our effective rate for 2014 and 2013.
Equity in Net Income of Unconsolidated Investments
Equity in net income of unconsolidated investments was $35.7 million for the year ended December 31, 2014 compared to $31.7 million in the same period last year. This increase was due primarily to higher equity income reported by our Refining Solutions segment joint ventures Nippon Ketjen Company Limited and Fábrica Carioca de Catalisadores SA, our Performance Chemicals segment joint venture Stannica, and our Magnifin joint venture (included in All Other), partly offset by lower equity income amounts reported by our Refining Solutions segment joint venture Eurecat.
(Loss) Income from Discontinued Operations
(Loss) income from discontinued operations, after income taxes, was ($69.5) million for the year ended December 31, 2014, compared to $4.1 million for the year ended December 31, 2013. Included in 2014 is a pre-tax charge of ($85.5) million ($65.7 million after income taxes), which represented the difference between the carrying value of the related assets and their fair value as determined by the sales price less estimated costs to sell. This charge was primarily attributable to the write-off of goodwill, intangibles and long-lived assets, net of cumulative foreign currency translation gains of $17.8 million.
Net Income Attributable to Noncontrolling Interests
For the year ended December 31, 2014, net income attributable to noncontrolling interests was $27.6 million compared to $26.7 million in the same period last year. This increase of $0.9 million was due primarily to higher profits of our consolidated joint venture JBC in the 2014 period.
Net Income Attributable to Albemarle Corporation
Net income attributable to Albemarle Corporation decreased to $133.3 million for the year ended December 31, 2014, from $413.2 million for the corresponding period of 2013 primarily due to an unfavorable impact of $73.6 million (after income taxes) related to discontinued operations, unfavorable impacts of $266.4 million related to pension and OPEB items mainly resulting from an actuarial loss in 2014 compared to an actuarial gain in 2013, charges of $30.2 million in 2014 for certain significant acquisition-related costs (of which $23.6 million relates to the acquisition of Rockwood), higher manufacturing and SG&A costs of approximately $33.0 million, higher interest and financing expenses of $9.8 million, and higher other expenses, net, of $10.1 million, partly offset by lower income tax expense of $116.0 million, lower restructuring and other, net, of $7.4 million, favorable volume impacts of approximately $12.2 million on market demand, and lower variable input costs of approximately $9.3 million.
Other Comprehensive (Loss) Income, Net of Tax
Total other comprehensive (loss) income, after income taxes, was ($178.7) million in 2014 compared to $31.3 million in 2013. The majority of these amounts are the result of translating our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In 2014, other comprehensive (loss) from foreign currency translation adjustments was ($168.8) million, mainly as a result of unfavorable movements of approximately $(124) million in the European Union Euro, $(18) million in the Chinese Renminbi and ($13) million in the Brazilian Real. Also included in total other comprehensive (loss) income, for 2014 is ($21.0) million related to a realized loss on an interest rate swap which settled in the fourth quarter, and $11.4 million in connection with the revaluation of our €700.0 million senior notes and settlement of related foreign currency forward contracts, both of which were designated as a hedge of our net investment in foreign operations. In 2013, other comprehensive income from foreign currency translation adjustments was $31.7 million, mainly as a result of favorable movements in the European Union Euro of approximately $42 million, partially offset by unfavorable movements in the Brazilian Real of approximately $14 million.
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Albemarle Corporation and Subsidiaries | ||
Year Ended December 31, | Percentage Change | ||||||||||||||||
2014 | % | 2013 | % | 2014 vs. 2013 | |||||||||||||
(In thousands, except percentages) | |||||||||||||||||
Net sales: | |||||||||||||||||
Performance Chemicals | $ | 1,121,645 | 45.9 | % | $ | 1,141,890 | 47.7 | % | (2 | )% | |||||||
Refining Solutions | 852,139 | 34.8 | % | 775,207 | 32.4 | % | 10 | % | |||||||||
All Other | 471,764 | 19.3 | % | 477,173 | 19.9 | % | (1 | )% | |||||||||
Total net sales | $ | 2,445,548 | 100.0 | % | $ | 2,394,270 | 100.0 | % | 2 | % | |||||||
Adjusted EBITDA: | |||||||||||||||||
Performance Chemicals | $ | 306,572 | 54.5 | % | $ | 364,712 | 65.4 | % | (16 | )% | |||||||
Refining Solutions | 256,485 | 45.6 | % | 190,388 | 34.1 | % | 35 | % | |||||||||
All Other | 73,973 | 13.2 | % | 71,691 | 12.9 | % | 3 | % | |||||||||
Corporate | (74,875 | ) | (13.3 | )% | (69,240 | ) | (12.4 | )% | 8 | % | |||||||
Total adjusted EBITDA | $ | 562,155 | 100.0 | % | $ | 557,551 | 100.0 | % | 1 | % | |||||||
See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, to Net income (loss) attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with GAAP, (in thousands):
Performance Chemicals | Refining Solutions | Reportable Segments Total | All Other | Corporate | Consolidated Total | ||||||||||||||||||
2014 | |||||||||||||||||||||||
Adjusted EBITDA | $ | 306,572 | $ | 256,485 | $ | 563,057 | $ | 73,973 | $ | (74,875 | ) | $ | 562,155 | ||||||||||
Depreciation and amortization(a) | (51,707 | ) | (32,670 | ) | (84,377 | ) | (13,478 | ) | (2,552 | ) | (100,407 | ) | |||||||||||
Restructuring and other, net | — | — | — | — | (25,947 | ) | (25,947 | ) | |||||||||||||||
Acquisition and integration related costs(b) | — | — | — | — | (30,158 | ) | (30,158 | ) | |||||||||||||||
Interest and financing expenses | — | — | — | — | (41,358 | ) | (41,358 | ) | |||||||||||||||
Income tax expense | — | — | — | — | (18,484 | ) | (18,484 | ) | |||||||||||||||
Loss from discontinued operations (net of tax) | — | — | — | — | (69,531 | ) | (69,531 | ) | |||||||||||||||
Non-operating pension and OPEB items | — | — | — | — | (125,462 | ) | (125,462 | ) | |||||||||||||||
Other(c) | — | — | — | — | (17,492 | ) | (17,492 | ) | |||||||||||||||
Net income (loss) attributable to Albemarle Corporation | $ | 254,865 | $ | 223,815 | $ | 478,680 | $ | 60,495 | $ | (405,859 | ) | $ | 133,316 | ||||||||||
2013 | |||||||||||||||||||||||
Adjusted EBITDA | $ | 364,712 | $ | 190,388 | $ | 555,100 | $ | 71,691 | $ | (69,240 | ) | $ | 557,551 | ||||||||||
Depreciation and amortization(a) | (46,225 | ) | (33,580 | ) | |||||||||||||||||||