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(Exact name of registrant as specified in its charter)
_________________________________________________
iVirginia
i54-1692118
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i4250 Congress Street, Suite 900
iCharlotte,
iNorth Carolinai28209
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code - i(980)i299-5700
_________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCOMMON
STOCK, $.01 Par Value
iALB
iNew York Stock Exchange
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒No ☐
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Number of shares of common stock, $.01 par value, outstanding as of October 31, 2022: i117,152,794
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE
1—iBasis of Presentation:
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Albemarle Corporation and our wholly-owned, majority-owned and controlled subsidiaries (collectively, “Albemarle,”“we,”“us,”“our” or the “Company”) contain all adjustments necessary
for a fair statement, in all material respects, of our consolidated balance sheets as of September 30, 2022 and December 31, 2021, our consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of changes in equity for the three- and nine-month periods ended September 30, 2022 and 2021 and our condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2022 and 2021. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December
31, 2021, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 22, 2022. The December 31, 2021 consolidated balance sheet data herein was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles (“GAAP”) in the United States (“U.S.”). The results of operations for the three-and nine-month periods ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the accompanying condensed consolidated financial statements and the notes thereto to conform to the current presentation.
Interest and financing expenses for the nine-month period ended September
30, 2022 include an expense of $i17.5 million for the correction of out-of-period errors regarding overstated capitalized interest values in prior periods. For the years ended December 31, 2021, 2020 and 2019, Interest expense was understated by $i11.4 million,
$i5.5 million and $i0.6 million, respectively. The Company does
not believe these adjustments are material to the consolidated financial statements for any of the prior periods presented or to the nine-month period ended September 30, 2022, in which they were corrected.
NOTE 2—iAcquisitions:
On October 25, 2022the Company completed the acquisition of all of the outstanding equity of Guangxi Tianyuan New Energy Materials Co., Ltd. (“Tianyuan”), for approximately $i200 million in cash. Tianyuan's operations include a recently constructed lithium processing plant strategically positioned near the Port of Qinzhou in Guangxi, which began commercial production in the first half of 2022. The plant has designed annual conversion capacity of up to i25,000
metric tons of LCE and is capable of producing battery-grade lithium carbonate and lithium hydroxide.
As this acquisition was completed on October 25, 2022, the preliminary fair value of the assets acquired and liabilities assumed are not recorded in the Company’s consolidated balance sheet as of September 30, 2022. The preliminary fair value of these assets and liabilities, as well as the results of operations of this acquisition, will be recorded in the fourth quarter of 2022. The Company has not completed the detailed valuation work necessary to arrive at the required estimates of the fair value of the assets acquired and liabilities assumed and the related
allocation of purchase price.
NOTE 3—iDivestitures:
On June 1, 2021, the Company completed the sale of its fine chemistry services (“FCS”) business
to W. R. Grace & Co. (“Grace”) for proceeds of approximately $i570 million, consisting of $i300 million in cash and the issuance to Albemarle of preferred
equity of a Grace subsidiary having an aggregate stated value of $i270 million. The preferred equity can be redeemed at Grace’s option under certain conditions and will accrue payment-in-kind (“PIK”) dividends at an annual rate of i12%
beginning two years after issuance.
As part of the transaction, Grace acquired our manufacturing facilities located in South Haven, Michigan and Tyrone, Pennsylvania. The sale of the FCS business reflects the Company’s commitment to investing in its core, growth-oriented business segments. During the nine-month period ended September 30, 2021, we recorded a gain of $ii428.4/ million
($ii330.9/
million after income taxes) related to the sale of this business. Historical financial statements include results from this business until divested on June 1, 2021.
We determined that the FCS business met the assets held for sale criteria in accordance with ASC 360, Property, Plant and Equipment during the first quarter of 2021. The results of operations of the business classified as held for sale are included in the consolidated statements of income through June 1, 2021. This business did not qualify for discontinued operations treatment because the Company’s management does not consider the sale as representing a strategic shift that had or will have a major effect on the
Company’s operations and financial results.
The
following table summarizes the changes in other intangibles and related accumulated amortization for the nine months ended September 30, 2022 (in thousands):
(a) Net
Book Value includes only indefinite-lived intangible assets.
/
NOTE 5—iIncome Taxes:
The effective income tax rate for the three-month and nine-month periods ended September 30,
2022 was i22.7% and i23.3%, respectively, compared to i22.2%
and i10.2% for the three-month and nine-month periods ended September 30, 2021, respectively. The three- and nine-month periods ended September 30, 2022 included a tax benefit related to global intangible low-taxed income, and net discrete tax benefits related to excess tax benefits realized from stock-based compensation arrangements and foreign return to provisions. The Company’s effective
income tax rate fluctuates based on, among other factors, the amount and location of income. The three- and nine-month periods ended September 30, 2021 included a tax benefit of $ii152.9/ million
related to an accrual recorded as a subsequent event for the settlement of an arbitration ruling for a prior legal matter in October 2021. See Note 10, “Commitments and Contingencies,” for further details of this legal matter. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the three- and nine-month periods ended September 30, 2022 was impacted by a variety of factors, primarily global intangible low-taxed income and the location in which income was earned, and an uncertain tax position recorded in Chile. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the three-month and nine-month periods ended September 30, 2021 was impacted by a variety of factors, primarily global intangible low-taxed income, the location in which income was earned. In addition, the
three- and nine-month periods ended September 30, 2021 includes a $ii97.5/ million
tax expense recorded for the gain on the sale of the FCS business, offset by the tax benefit for the settlement of the arbitration ruling noted above and a benefit from foreign rate differences.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE
6—iEarnings Per Share:
i
Basic and diluted earnings per share for the three-month and nine-month periods ended September 30,
2022 and 2021 are calculated as follows (in thousands, except per share amounts):
Net income (loss) attributable to Albemarle Corporation
$
i897,215
$
(i392,781)
$
i1,557,371
$
i127,496
Denominator:
Weighted-average
common shares for basic earnings per share
i117,136
i116,965
i117,106
i115,455
Basic
earnings (loss) per share
$
i7.66
$
(i3.36)
$
i13.30
$
i1.10
Diluted
earnings per share
Numerator:
Net income (loss) attributable to Albemarle Corporation
$
i897,215
$
(i392,781)
$
i1,557,371
$
i127,496
Denominator:
Weighted-average
common shares for basic earnings per share
i117,136
i116,965
i117,106
i115,455
Incremental
shares under stock compensation plans
i733
i—
i643
i685
Weighted-average
common shares for diluted earnings per share
i117,869
i116,965
i117,749
i116,140
Diluted
earnings (loss) per share
$
i7.61
$
(i3.36)
$
i13.23
$
i1.10
/
On
February 8, 2021, we completed an underwritten public offering of i8,496,773 shares of our common stock, par value $i0.01
per share, at a price to the public of $i153.00 per share. The Company also granted to the underwriters an option to purchase up to an additional i1,274,509
shares, which was exercised. The total gross proceeds from this offering were approximately $i1.5 billion, before deducting expenses, underwriting discounts and commissions. The net proceeds were used for debt repayments and general corporate purposes.
(a)Included
$i132.1 million and $i149.4 million at September 30, 2022 and December
31, 2021, respectively, of work in process in our Lithium segment.
/
NOTE 8—iInvestments:
The Company holds
a i49% equity interest in Windfield Holdings Pty. Ltd. (“Talison”), where the ownership parties share risks and benefits disproportionate to their voting interests. As a result, the Company considers Talison to be a variable interest entity (“VIE”), however this investment is not consolidated as the Company is not the primary beneficiary. The carrying
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
amount of our i49% equity interest in Windfield, which is our most significant VIE, was $i706.5
million and $i476.6 million at September 30, 2022 and December 31, 2021, respectively. The Company’s aggregate net investment in all other entities which it considers to be VIEs of which the Company is not the primary beneficiary was $i7.2
million at September 30, 2022 and $i8.0 million at December 31, 2021. The Company’s unconsolidated VIEs are reported in Investments on the consolidated balance sheets. The Company does not guarantee debt for, or have other financial support obligations to, these entities, and its maximum exposure to loss in connection
with its continuing involvement with these entities is limited to the carrying value of the investments.
Effective September 30, 2022the Company began recording the balance of deferred profits on sales from its equity method investments to the Company to Inventories, specifically finished goods. Historically this balance was recorded in Investments in the consolidated balance sheets. As a result, the historical balances have been reclassified to reflect the current period presentation. This change in presentation was made to better align the location of these deferred profits with their respective inventory balances until they are sold to a third party. Deferred profits from equity method investments totaled
$i222.1 million and $i14.3 million as of September
30, 2022 and December 31, 2021, respectively, with the increase primarily driven by increased pricing and volume of sales from the Talison joint venture. There was no impact to the statements of income, comprehensive (loss) income, changes in equity or cash flows for any period as a result of this change in presentation. In addition, the Company does not believe this change in presentation is material to the consolidated financial statements for any prior period.
As part of the proceeds from the sale of the FCS business on June 1, 2021, Grace issued Albemarle preferred equity of a Grace subsidiary having an aggregate stated value of $i270 million.
The preferred equity can be redeemed at Grace’s option under certain conditions and will accrue PIK dividends at an annual rate of i12% beginning two years after issuance. This preferred equity had a fair value of $i253.7
million and $i246.5 million at September 30, 2022 and December 31, 2021, respectively, which is reported in Investments in the consolidated balance sheets.
On
May 13, 2022, the Company issued a series of notes (collectively, the “2022 Notes”) as follows:
•$i650.0 million aggregate principal amount of senior notes, bearing interest at a rate of i4.65%
payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately i4.84%. These senior notes mature on June 1, 2027.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
•$i600.0 million aggregate principal amount of senior notes, bearing interest at a rate of i5.05%
payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately i5.18%. These senior notes mature on June 1, 2032.
•$i450.0 million
aggregate principal amount of senior notes, bearing interest at a rate of i5.65% payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately i5.71%.
These senior notes mature on June 1, 2052.
The net proceeds from the issuance of the 2022 Notes were used to repay the balance of the commercial paper notes, the remaining balance of $i425.0 million of the ii4.15/%
Senior Notes due 2024 (the “2024 Notes”) and for general corporate purposes. The 2024 Notes were originally due to mature on December 15, 2024 and bore interest at a rate of i4.15%. During the nine-month period ended September 30, 2022, the Company recorded a loss on early extinguishment of debt of $i19.2 million
in Interest and financing expenses, representing the tender premiums, fees, unamortized discounts and unamortized deferred financing costs from the redemption of the 2024 Notes. In addition, the loss on early extinguishment of debt includes the accelerated amortization of the interest rate swap associated with the 2024 Notes from Accumulated other comprehensive income.
On October 28, 2022, we amended our revolving, unsecured credit agreement (the “2018 Credit Agreement”), which provides for borrowings of up to $i1.5 billion
and matures on October 28, 2027. This credit agreement was originally dated as of June 21, 2018, and was previously amended on August 14, 2019, May 11, 2020 and December 10, 2021. Borrowings under the 2018 Credit Agreement bear interest at variable rates based on a benchmark rate depending on the currency in which the loans are denominated, plus an applicable margin which ranges from i0.91%
to i1.375%, depending on the Company’s credit rating from Standard & Poor’s Ratings Services LLC, Moody’s Investors Services, Inc. and Fitch Ratings, Inc. With respect to loans denominated in U.S. dollars, interest is calculated using the term Secured Overnight Financing Rate (“SOFR”) plus a term SOFR adjustment of i0.10%,
plus the applicable margin.
During the second quarter of 2022 the Company drew $i250 million under the unsecured credit facility originally entered into on August 14, 2019, as amended and restated on December 15, 2020 and again on December 10, 2021 (the “2019 Credit
Facility”) for general corporate purposes. The applicable margin on the 2019 Credit Facility was i1.125% at September 30, 2022. On October 24, 2022, the 2019 Credit Facility was terminated, with the outstanding balance of $i250 million
repaid using cash on hand.
In the first quarter of 2021, the Company made certain debt principal payments using proceeds from the February 2021 underwritten public offering of common stock. As a result, included in Interest and financing expenses for the nine-month period ended September 30, 2021 is a loss on early extinguishment of debt of $i29.0 million representing the
tender premiums, fees, unamortized discounts and unamortized deferred financing costs from the redemption of this debt.
Prior to repayment in the first quarter of 2021, the carrying value of the i1.875% Euro-denominated senior notes was designated as an effective hedge of the net investment in certain foreign subsidiaries where the Euro serves as the functional currency, and gains or losses on the revaluation of these senior notes to our reporting
currency were recorded in accumulated other comprehensive loss. Upon repayment of these notes, this net investment hedge was discontinued. The balance of foreign exchange revaluation gains and losses associated with this discontinued net investment hedge will remain within accumulated other comprehensive loss until the hedged net investment is sold or liquidated. Prior to the net investment hedge being discontinued, we recorded a gain of $i5.1 million (net of income taxes)
during the nine-month period ended September 30, 2021 in accumulated other comprehensive loss.
NOTE 10—iCommitments and Contingencies:
Environmental
iThe
following activity was recorded in environmental liabilities for the nine months ended September 30, 2022 (in thousands):
Environmental
remediation liabilities included discounted liabilities of $i37.3 million and $i39.7
million at September 30, 2022 and December 31, 2021, respectively, discounted at rates with a weighted-average of ii3.5/%,
and with the undiscounted amount totaling $i65.2 million and $i70.0
million at September 30, 2022 and December 31, 2021, respectively. For certain locations where the Company is operating groundwater monitoring and/or remediation systems, prior owners or insurers have assumed all or most of the responsibility.
The amounts recorded represent our future remediation and other anticipated environmental liabilities. These liabilities typically arise during the normal course of our operational and environmental management activities or at the time of acquisition of the site, and are based on internal analysis as well as input from outside consultants. As evaluations proceed at each relevant site, changes in risk assessment practices, remediation techniques and regulatory requirements can occur, therefore such liability
estimates may be adjusted accordingly. The timing and duration of remediation activities at these sites will be determined when evaluations are completed. Although it is difficult to quantify the potential financial impact of these remediation liabilities, management estimates (based on the latest available information) that there is a reasonable possibility that future environmental remediation costs associated with our past operations could represent an additional $i9
million before income taxes, in excess of amounts already recorded.
We believe that any sum we may be required to pay in connection with environmental remediation matters in excess of the amounts recorded would likely occur over a period of time and would likely not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis although any such sum could have a material adverse impact on our results of operations, financial condition or cash flows in a particular quarterly reporting period.
Litigation
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 the federal Comprehensive Environmental Response, Compensation and Liability
Act, commonly known as CERCLA or 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. Costs for legal services are generally expensed as incurred.
On February 6, 2017, Huntsman International LLC (“Huntsman”), a subsidiary of Huntsman Corporation, filed a lawsuit in New York state court against Rockwood Holdings, Inc. (“Rockwood”), Rockwood Specialties, Inc., certain former executives of Rockwood and its subsidiaries, Seifollah Ghasemi, Thomas Riordan, Andrew Ross, and Michael Valente, and Albemarle. The lawsuit
arises out of Huntsman’s acquisition of certain Rockwood subsidiaries in connection with a stock purchase agreement (the “SPA”), dated September 17, 2013. Before that transaction closed on October 1, 2014, Albemarle began discussions with Rockwood to purchase all outstanding equity of Rockwood and did so in a transaction that closed on January 12, 2015. Huntsman’s complaint asserted that certain technology that Rockwood had developed for a production facility in Augusta, Georgia, and which was among the assets that Huntsman acquired pursuant to the SPA, did not work, and that Rockwood and the defendant executives had intentionally misled Huntsman about that technology in connection with the Huntsman-Rockwood transaction. The
complaint asserted claims for, among other things, fraud, negligent misrepresentation, and breach of the SPA, and sought certain costs for completing construction of the production facility.
On March 10, 2017, Albemarle moved in New York state court to compel arbitration, which was granted on January 8, 2018 (although Huntsman unsuccessfully appealed that decision). Huntsman’s arbitration demand asserted claims substantially similar to those asserted in its state court complaint, and sought various forms of legal remedies, including cost overruns, compensatory damages, expectation damages, punitive damages, and restitution. After a trial, the arbitration panel issued an award on October 28, 2021, awarding approximately $i600 million
(including interest) to be paid by Albemarle to Huntsman, in addition to the possibility of attorney’s fees, costs and expenses. Following the arbitration panel decision, Albemarle reached a
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
settlement with Huntsman to pay $i665 million
in two equal installments, with the first payment made in December 2021. The second and final payment of $i332.5 million was made in May 2022. As a result, the consolidated statements of income for the three- and nine-month periods ended September 30, 2021, included a loss of $ii657.4/ million
($ii504.5/ million
net of income tax), inclusive of estimated possible legal fees incurred by Huntsman and other related obligations, to reflect the increase in liabilities for this legal matter.
As first reported in 2018, following receipt of information regarding potential improper payments being made by third-party sales representatives of our Refining Solutions business, within our Catalysts segment, we promptly retained outside counsel and forensic accountants to investigate potential violations of the Company’s Code of Conduct, the Foreign Corrupt Practices Act, and other potentially applicable laws. Based on this internal investigation, we have voluntarily self-reported potential issues relating to the use of third-party sales representatives in our Refining Solutions business, within our Catalysts segment, to the U.S. Department of Justice (“DOJ”),
the SEC, and the Dutch Public Prosecutor (“DPP”), and are cooperating with the DOJ, the SEC, and the DPP in their review of these matters. In connection with our internal investigation, we have implemented, and are continuing to implement, appropriate remedial measures. We have commenced discussions with the SEC, DOJ and DPP about a potential resolution of these matters.
At this time, we are unable to predict the duration, scope, result, or related costs associated with the investigations. We also are unable to predict what action may be taken by the DOJ, the SEC, or the DPP, or what penalties or remedial actions they may ultimately seek. Any determination that our operations or activities are not, or were not, in compliance with existing laws or regulations could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses. We do not believe, however, that any such fines, penalties,
disgorgement, equitable relief, or other losses would have a material adverse effect on our financial condition or liquidity. However, an adverse resolution could have a material adverse effect on our results of operations in a particular period.
Indemnities
We are indemnified by third parties in connection with certain matters related to acquired and divested businesses. Although we believe that the financial condition of those parties who may have indemnification obligations to the Company is generally sound, in the event the Company seeks indemnity under any of these agreements or through other means, there can be no assurance that any party who may have obligations to indemnify us will adhere to their obligations
and we may have to resort to legal action to enforce our rights under the indemnities.
The Company may be subject to indemnity claims relating to properties or businesses it divested, including properties or businesses of acquired businesses that were divested prior to the completion of the acquisition. In the opinion of management, and based upon information currently available, the ultimate resolution of any indemnification obligations owed to the Company or by the Company is not expected to have a material effect on the Company’s financial condition, results of operations or cash flows.
The Company had approximately $i55.8 million and $i66.8 million at September 30,
2022 and December 31, 2021, respectively, recorded in Other noncurrent liabilities, primarily related to the indemnification of certain income and non-income tax liabilities associated with the Chemetall Surface Treatment entities sold in 2017.
Other
We have contracts with certain of our customers which serve as guarantees on product delivery and performance according to customer specifications that can cover both shipments on an individual basis, as well as blanket coverage of multiple shipments under certain customer supply contracts. The financial coverage provided by these guarantees is typically based on a percentage of net sales value.
NOTE
11—iiLeases:/
We lease certain
office space, buildings, transportation and equipment in various countries. The initial lease terms generally range from i1 to i30 years for real estate leases, and from ii2/
to i15 years for non-real estate leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the lease term.
Many leases include options to terminate or renew, with renewal terms that can extend the lease term from ii1/
to i50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
i
The following table provides details of our lease contracts for the three-month and nine-month periods
ended September 30, 2022 and 2021 (in thousands):
Supplemental
cash flow information related to our lease contracts for the nine-month periods ended September 30, 2022 and 2021 is as follows (in thousands):
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
i
Supplemental balance sheet information related to our lease contracts, including the location on balance sheet, at September 30,
2022 and December 31, 2021 is as follows (in thousands, except as noted):
(a) Balance
includes accrued interest of finance lease recorded in Accrued liabilities.
/
iiMaturities
of lease liabilities at September 30, 2022 were as follows (in thousands):
Operating Leases
Finance Leases
Remainder of 2022
$
i9,376
$
i1,470
2023
i33,845
i5,879
2024
i21,552
i5,879
2025
i12,328
i5,879
2026
i9,977
i5,303
Thereafter
i121,460
i96,580
Total
lease payments
i208,538
i120,990
Less
imputed interest
i76,301
i46,509
Total
$
i132,237
$
i74,481
//
NOTE
12—iSegment Information:
During 2022, the Company’s ithree
reportable segments include: (1) Lithium; (2) Bromine; and (3) Catalysts. Each segment has a dedicated team of sales, research and development, process engineering, manufacturing and sourcing, and business strategy personnel and has full accountability for improving execution through greater asset and market focus, agility and responsiveness. This business structure aligns with the markets and customers we serve through each of the segments. This structure also facilitates the continued standardization of business processes across the organization, and is consistent with the manner in which information is presently used internally by the Company’s chief operating decision maker to evaluate performance and make resource allocation decisions. In August 2022, the Company announced plans to realign its Lithium
and Bromine global business units into a new corporate structure designed to better meet customer needs and foster talent required to deliver in a competitive global environment. In addition, the Company announced its decision to retain its Catalysts business under a separate, wholly-owned subsidiary. The realignment is expected to be completed in the first quarter of 2023, and will
Notes to the Condensed Consolidated
Financial Statements
(Unaudited)
result in the following ithree reportable segments: (1) Energy Storage; (2) Specialties; and (3) Catalysts. The Company will continue to report its segments in its current structure until the new structure becomes effective.
Summarized financial information concerning our reportable segments is shown in the following tables. The
“All Other” category included only the FCS business that did not fit into any of our core businesses. On June 1, 2021, we completed the sale of the FCS business. See Note 3, “Divestitures,” for additional information. Amounts in the “All Other” category represent activity in this business until divested on June 1, 2021.
The Corporate category is not considered to be a segment and includes corporate-related items not allocated to the operating segments. Pension and other post-employment benefit (“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 reportable segments, All Other, and Corporate, whereas the remaining components of pension and OPEB benefits cost or credit (“Non-operating
pension and OPEB items”) are included in Corporate. Segment data includes inter-segment transfers of raw materials at cost and allocations for certain corporate costs.
The Company’s chief operating decision maker uses adjusted EBITDA (as defined below) to assess the ongoing performance of the Company’s business segments and to allocate resources. The Company defines adjusted EBITDA as earnings before interest and financing expenses, income tax expenses, depreciation and amortization, as adjusted on a consistent basis for certain non-operating, non-recurring or unusual items in a balanced manner and on a segment basis. These non-operating, non-recurring or unusual items
may include acquisition and integration related costs, gains or losses on sales of businesses, restructuring charges, facility divestiture charges, certain litigation and arbitration costs and charges, non-operating pension and OPEB items and other significant non-recurring items. In addition, management uses adjusted EBITDA for business and enterprise planning purposes and as a significant component in the calculation of performance-based compensation for management and other employees. 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 is a financial measure that is not required by, or presented in accordance with, U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to Net (loss) income attributable to Albemarle Corporation,
the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, or any other financial measure reported in accordance with U.S. GAAP.
See
below for a reconciliation of adjusted EBITDA, a non-GAAP financial measure, from Net (loss) income attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP (in thousands):
Net income (loss) attributable to Albemarle Corporation
$
i237,293
$
i235,670
$
i41,401
$
i27,988
$
(i414,856)
$
i127,496
Depreciation
and amortization
i99,559
i37,628
i38,293
i1,870
i8,415
i185,765
Restructuring
and other(c)
i—
i—
i—
i—
i2,294
i2,294
Gain
on sale of business(d)
i—
i—
i—
i—
(i428,424)
(i428,424)
Acquisition
and integration related costs(a)
i—
i—
i—
i—
i5,629
i5,629
Interest
and financing expenses(h)
i—
i—
i—
i—
i56,170
i56,170
Income
tax expense
i—
i—
i—
i—
i14,422
i14,422
Non-operating
pension and OPEB items
i—
i—
i—
i—
(i16,407)
(i16,407)
Legal
accrual(e)
i—
i—
i—
i—
i657,412
i657,412
Albemarle
Foundation contribution(i)
i—
i—
i—
i—
i20,000
i20,000
Other(f)
i4,441
i—
i—
i—
i13,453
i17,894
Adjusted
EBITDA
$
i341,293
$
i273,298
$
i79,694
$
i29,858
$
(i81,892)
$
i642,251
(a)Costs
related to the acquisition, integration and potential divestitures for various significant projects, recorded in Selling, general and administrative expenses (“SG&A”).
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(b)Included amounts for the three months ended September 30, 2022 recorded in:
•Cost
of goods sold - $i2.7 million of expense related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment.
•SG&A - $i1.9 million
of expense primarily related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment and $i1.3 million primarily related to facility closure expenses of offices in Germany.
•Other income, net - $i10.6 million
net gain related to the fair value adjustment of equity securities in a public company, a $i3.0 million gain from the reversal of a liability related to a previous divestiture and $i1.1 million
of gain resulting from the adjustment of indemnification related to previously disposed businesses.
Included amounts for the nine months ended September 30, 2022 recorded in:
•Cost of goods sold - $i2.7 million of expense related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment, and $i0.5 million
related to the settlement of a legal matter resulting from a prior acquisition.
•SG&A - $i3.2 million primarily related to facility closure expenses of offices in Germany, $i2.8 million
of charges for environmental reserves at sites not part of our operations and $i1.9 million of expense primarily related to one-time retention payments for certain employees during the Catalysts strategic review, partially offset by $i4.3 million
of gains from the sale of legacy properties not part of our operations.
•Other income, net - $i10.6 million net gain related to the fair value adjustment of equity securities in a public company, a $i3.0 million
gain from the reversal of a liability related to a previous divestiture, $i1.1 million of gain resulting from the adjustment of indemnification related to previously disposed businesses and a $i0.6 million
gain related to a settlement received from a legal matter in a prior period.
(c)In 2021, the Company recorded facility closure related to offices in Germany, and severance expenses in Germany and Belgium, in SG&A.
(d)See Note 3, “Divestitures,” for additional information.
(e)Loss recorded in Other expense, net in the three and nine months ended September 30, 2021 related to the settlement of an arbitration ruling for a prior legal matter. See Note 10, “Commitments and Contingencies,” for further details.
(f)Included amounts for the three months ended
September 30, 2021 recorded in:
•SG&A - $i2.5 million of expenses primarily related to non-routine labor and compensation related costs that are outside normal compensation arrangements.
•Other income, net - $i0.1 million
of loss resulting from the adjustment of indemnification related to previously disposed businesses.
Included amounts for the nine months ended September 30, 2021 recorded in:
•SG&A - $i8.6 million of expenses primarily related to non-routine labor and compensation related costs that are outside normal compensation arrangements, a $i4.0 million
loss resulting from the sale of property, plant and equipment and $i1.6 million of charges for an environmental reserve at a site not part of our operations.
•Other income, net - $i3.7 million
of expenses primarily related to asset retirement obligation charges to update of an estimate at a site formerly owned by Albemarle.
(g)Expense recorded as a result of revised estimates of the obligation to construct certain lithium hydroxide conversion assets in Kemerton, Western Australia, due to cost overruns from supply chain, labor and COVID-19 pandemic related issues. The corresponding obligation was recorded in Accrued liabilities to be transferred to Mineral Resources Limited (“MRL”), which maintains a i40% ownership interest in these Kemerton
assets.
(h)Included in Interest and financing expenses is a loss on early extinguishment of debt of $i19.2 million and $i29.0 million
for the nine months ended September 30, 2022 and 2021, respectively. See Note 9, “Long-term Debt,” for additional information. In addition, Interest and financing expenses for the nine months ended September 30, 2022 includes the correction of an out of period error of $i17.5 million related to the overstatement of capitalized interest in prior periods. See Note 1, “Basis of Presentation,” for further
details.
(i)Included in SG&A is a charitable contribution, using a portion of the proceeds received from the FCS divestiture, to the Albemarle Foundation, a non-profit organization that sponsors grants, health and social projects, educational initiatives, disaster relief, matching gift programs, scholarships and other charitable initiatives in locations where the Company’s employees live and the Company operates. This contribution is in addition to the normal annual contribution made to the Albemarle Foundation by the Company, and is significant in size and nature in that it is intended to provide more long-term benefits in these communities.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 13—iPension Plans and Other Postretirement Benefits:
i
The
components of pension and postretirement benefits cost (credit) for the three-month and nine-month periods ended September 30, 2022 and 2021 were as follows (in thousands):
Total
net pension and postretirement benefits credit
$
(i4,026)
$
(i3,986)
$
(i12,299)
$
(i12,451)
/
All
components of net benefit cost (credit), other than service cost, are included in Other income, net on the consolidated statements of income.
During the three-month and nine-month periods ended September 30, 2022, the Company made contributions of $i2.5 million and $i8.9
million, respectively, to its qualified and nonqualified pension plans. During the three-month and nine-month periods ended September 30, 2021, the Company made contributions of $i3.2 million and $i22.1
million, respectively, to its qualified and nonqualified pension plans. The contributions made in 2021 included deferred contributions from the prior year resulting from uncertainty during the COVID-19 pandemic.
The Company paid $i0.7 million and $i2.1
million in premiums to the U.S. postretirement benefit plan during the three-month and nine-month periods ended September 30, 2022, respectively. During the three-month and nine-month periods ended September 30, 2021, the Company paid $i0.7 million and $i2.1
million, respectively, in premiums to the U.S. postretirement benefit plan.
NOTE 14—iFair Value of Financial Instruments:
In assessing the fair value of financial instruments, we use methods and assumptions that are based on market conditions and other risk factors existing at the time of assessment. Fair value information for our financial instruments is as follows:
Long-Term
Debt—the fair values of our notes are estimated using Level 1 inputs and account for the difference between the recorded amount and fair value of our long-term debt. iThe carrying value of our remaining long-term debt reported in the accompanying consolidated balance sheets approximates fair value as substantially all of such debt bears interest based on prevailing variable market rates currently available in the countries in which we have borrowings.
Foreign
Currency Forward Contracts—during the fourth quarter of 2019, we entered into a foreign currency forward contract to hedge the cash flow exposure of non-functional currency purchases during the construction of the Kemerton plant in Australia. This derivative financial instrument is used to manage risk and is not used for trading or other speculative purposes. This foreign currency forward contract has been designated as a hedging instrument under ASC 815, Derivatives and Hedging. We had outstanding designated foreign currency forward contracts with notional values
totaling the equivalent of $i101.6 million and $i36.5 million at September 30, 2022 and December
31, 2021, respectively.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
We also enter into foreign currency forward contracts in connection with our risk management strategies that have not been designated as hedging instruments under ASC 815, Derivatives and Hedging,
in an attempt to minimize the financial impact of changes in foreign currency exchange rates. These derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. The fair values of our non-designated foreign currency forward contracts are estimated based on current settlement values. At September 30, 2022 and December 31, 2021, we had outstanding non-designated foreign currency forward contracts with notional values totaling $i2,057.7
million and $i618.1 million, respectively, hedging our exposure to various currencies including the Chilean Peso, Euro, Chinese Renminbi, Japanese Yen, Australian Dollar and Singapore Dollar.
i
The
following table summarizes the fair value of our foreign currency forward contracts included in the consolidated balance sheets as of September 30, 2022 and December 31, 2021 (in thousands):
The
following table summarizes the net gains (losses) recognized for our foreign currency forward contracts during the three-month and nine-month periods ended September 30, 2022 and 2021 (in thousands):
(Loss) income recognized in Other comprehensive loss
$
(i9,653)
$
i214
$
(i8,144)
$
(i563)
Not
designated as hedging instruments
(Loss) income recognized in Other income, net(a)
$
(i9,056)
$
(i1,199)
$
(i36,326)
$
i658
(a) Fluctuations
in the value of our foreign currency forward contracts not designated as hedging instruments are generally expected to be offset by changes in the value of the underlying exposures being hedged, which are also reported in Other income, net.
/
In addition, for the nine-month periods ended September 30, 2022 and 2021, we recorded net cash (settlements) receipts of ($i38.6)
million and $i0.8 million, respectively, in Other, net, in our condensed consolidated statements of cash flows.
Unrealized gains and losses related to the cash flow hedges will be reclassified to earnings over the life of the related assets when settled and the related assets are placed into service.
The counterparties to our foreign currency forward contracts are major financial institutions with
which we generally have other financial relationships. We are exposed to credit loss in the event of nonperformance by these counterparties. However, we do not anticipate nonperformance by the counterparties.
NOTE 15—iFair Value Measurement:
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Level 1
Unadjusted
quoted prices in active markets for identical assets or liabilities
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair value measurement. iThe following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 (in thousands):
(a)Preferred
equity of a Grace subsidiary acquired as a portion of the proceeds of the FCS sale on June 1, 2021. See Note 2, “Divestitures,” for further details on the material terms and conditions. A third-party estimate of the fair value was prepared using expected future cash flows over the period up to when the asset is likely to be redeemed, applying a discount rate that appropriately captures a market participant's view of the risk associated with the investment. These are considered to be Level 3 inputs.
(b)We maintain an Executive Deferred Compensation Plan (“EDCP”) that was adopted in 2001 and subsequently amended. The purpose of the EDCP is to provide current tax planning opportunities as well as supplemental funds upon the retirement or death of certain of our employees. The EDCP is intended to aid in attracting and retaining employees of
exceptional ability by providing them with these benefits. We also maintain a Benefit Protection Trust (the “Trust”) that was created to provide a source of funds to assist in meeting the obligations of the EDCP, subject to the claims of our creditors in the event of our insolvency. Assets of the Trust are consolidated in accordance with authoritative guidance. The assets of the Trust consist primarily of mutual fund investments (which are accounted for as trading securities and are marked-to-market on a monthly basis through the consolidated statements of income) and cash and cash equivalents. As such, these assets and obligations are classified within Level 1.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(c)Holdings in equity securities of public companies reported in Investments in the consolidated balance sheets. The fair value is measured using publicly available share prices of the investments, with any changes reported in Other income (expense), net, in our consolidated statements of income.
(d)Primarily consists of private equity securities reported in Investments in the consolidated balance sheets. The changes in fair value are reported in Other income (expense), net, in our consolidated statements of income.
(e)Holdings
in certain private equity securities are measured at fair value using the net asset value per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy.
(f)As a result of our global operating and financing activities, we are exposed to market risks from changes in foreign currency exchange rates which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from foreign currency exchange rate fluctuations through the use of foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations or market transactions in either the listed or over-the-counter markets. As such, these derivative
instruments are classified within Level 2. See Note 14, “Fair Value of Financial Instruments,” for further details about our foreign currency forward contracts.
i
The following tables set forth the reconciliation of the beginning and ending balance for the Level 3 recurring fair value measurements (in thousands):
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 16—iAccumulated Other Comprehensive (Loss) Income:
i
The
components and activity in Accumulated other comprehensive (loss) income (net of deferred income taxes) consisted of the following during the periods indicated below (in thousands):
(a)During
the first quarter of 2021 the net investment hedge was discontinued following the repayment of the i1.875% Euro-denominated senior notes. The balance of foreign exchange revaluation gains and losses associated with this discontinued net investment hedge have been reclassified to Foreign currency translation and other, and will remain within accumulated other comprehensive loss until the hedged net investment is sold or liquidated.
(b)We entered into a foreign currency forward contract,
which was designated and accounted for as a cash flow hedge under ASC 815, Derivatives and Hedging. See Note 14, “Fair Value of Financial Instruments,” for additional information.
(c)The pre-tax portion of amounts reclassified from accumulated other comprehensive loss is included in Interest and financing expenses. The balance of this interest rate swap was being amortized to Interest and financing expenses over the life of the ii4.15/%
senior notes originally due in 2024. As discussed in Note 9, “Long-term Debt,”the Company repaid these notes in the second quarter of 2022, and as
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
a
result, reclassified the remaining balance of this interest rate swap to interest expense during the same period as part of the early extinguishment of debt.
i
The amount of income tax (expense) benefit allocated to each component of Other comprehensive (loss) income for the three-month and nine-month periods ended September 30, 2022 and 2021 is provided in the following tables (in thousands):
Our consolidated statements of income include sales to and purchases from unconsolidated affiliates in the ordinary
course of business as follows (in thousands):
(a)Increases
in purchases from unconsolidated affiliates primarily relate to increased pricing and volume of spodumene purchased from the Company’s Windfield joint venture.
Our consolidated balance sheets include accounts receivable due from and payable to unconsolidated affiliates in the ordinary course of business as follows (in thousands):
(a)Increases
in payables to unconsolidated affiliates primarily relate to increased purchases of spodumene purchased from the Company’s joint venture under normal payment terms.
Supplemental non-cash disclosure related to investing and financing activities:
Capital
expenditures included in Accounts payable
$
i253,183
$
i157,743
Promissory
note issued for capital expenditures(a)
$
i10,876
$
i—
Non-cash
proceeds from divestitures(b)
$
i—
$
i244,530
(a)During
the first quarter of 2022, the Company issued a promissory note with a present value of $i10.9 million for land purchased in Kings Mountain, NC. The promissory note is payable in equal annual installments from the years 2027 to 2048.
(b)Fair value of preferred equity of a Grace subsidiary received as part of the proceeds for the sale of the FCS business. See Note 2, “Divestitures,” for further details.
/
As
part of the purchase price paid for the acquisition of a i60% interest in the MRL Wodgina Project, the Company transferred $i116.0 million
and $i135.9 million of its construction in progress of the designated Kemerton assets during the nine months ended September 30, 2022 and 2021, respectively, representing MRL’s i40%
interest in the assets. The cash outflow for these assets was recorded in Capital expenditures within Cash flows from investing activities on the condensed consolidated statements of cash flows. The non-cash transfer of these assets is recorded in Non-cash transfer of i40% value of construction in progress of the Kemerton plant to MRL within Cash flows from operating activities on the consolidated statements of cash flows.
Other, net within Cash flows from operating activities on the condensed consolidated statements of cash flows for the nine
months
ended September 30, 2022 and 2021 included $i42.5 million and $i28.7 million,
respectively, representing the reclassification of the current portion of the one-time transition tax resulting from the enactment of the U.S. Tax Cuts and Jobs Act, from Other noncurrent liabilities to Income taxes payable within current liabilities.
In
March 2020, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued additional accounting guidance which clarifies that certain optional expedients and exceptions apply to derivatives that are affected by the discounting transition. The guidance under both FASB issuances is effective March 12, 2020
through December 31, 2022. The Company currently does not expect this guidance to have a significant impact on its consolidated financial statements.
In November 2021, the FASB issued accounting guidance that requires disclosures about government assistance in the notes to the financial statements. This guidance will require the disclosure of: (1) the types of government assistance received; (2) the accounting for such assistance; and (3) the effect of the assistance on a business entity’s financial statements. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The Company currently does not expect
this guidance to have a significant impact on its annual financial statement disclosures.
In March 2022, the FASB issued accounting guidance that expands the Company’s abilities to hedge the benchmark interest rate risk of portfolios of financial assets or beneficial interests in a fair value hedge. This guidance expands the use of the portfolio layer method to allow multiple hedges of a single closed portfolio of assets using spot starting, forward starting, and amortizing-notional swaps. This also permits both prepayable and non prepayable financial assets to be included in the closed portfolio of assets hedged in a portfolio layer hedge. In addition, this guidance requires that basis adjustments not be allocated to individual assets for active portfolio layer method hedges, but rather be maintained on the closed portfolio of assets as a
whole. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2022, including interim periods within those annual periods. The Company currently does not expect this guidance to have a significant impact on its consolidated financial statements.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Some of the information presented in this Quarterly Report on Form 10-Q, 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,”“would,”“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. 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 from the outlook expressed or implied in any forward-looking statement include, without limitation, information related to:
•changes in economic and business conditions;
•product development;
•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;
•fluctuations in lithium market pricing, which could impact our revenues and profitability particularly due to our increased exposure to index-referenced and variable-priced contracts for battery grade lithium sales;
•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;
•increases in the cost of raw materials and energy, and our ability to pass through such increases to our customers;
•technological change and development;
•changes in our markets in general;
•fluctuations
in foreign currencies;
•changes in laws and government regulation impacting our operations or our products;
•the occurrence of regulatory actions, proceedings, claims or litigation (including with respect to the U.S. Foreign Corrupt Practices Act and foreign anti-corruption laws);
•the occurrence of cyber-security breaches, terrorist attacks, industrial accidents or natural disasters;
•the effects of climate change, including any regulatory changes to which we might be subject;
•hazards associated with chemicals manufacturing;
•the inability to maintain current
levels of insurance, including 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 or interpretation;
•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;
•future
acquisition and divestiture transactions, including the ability to successfully execute, operate and integrate acquisitions and divestitures and incurring additional indebtedness;
•expected benefits from proposed transactions;
•timing of active and proposed projects;
•continuing uncertainties as to the duration and impact of the novel coronavirus (“COVID-19”) pandemic;
•performance of our partners in joint ventures and other projects;
•changes in credit ratings;
•the inability to realize the benefits of our decision to retain our Catalysts business and
to realign our Lithium and Bromine global business units into a new corporate structure; and
•the other factors detailed from time to time in the reports we file with the U.S. Securities and Exchange Commission (“SEC”) including those described under “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequently filed Quarterly Reports on Form 10-Q.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We assume no obligation to provide any 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 condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
The
following is a discussion and analysis of our results of operations for the three-month and nine-month periods ended September 30, 2022 and 2021. A discussion of our consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity.”
Overview
We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that are designed to meet our customers’ needs across a diverse range of end markets. Our corporate purpose is making the world safe and sustainable by powering the potential of people. The end markets we serve include energy storage, petroleum refining,
consumer electronics, construction, automotive, lubricants, pharmaceuticals and crop protection. We believe that our commercial and geographic diversity, technical expertise, access to high-quality resources, 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 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 of 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 to contribute to our sustainable
revenue. For example, our Lithium business contributes to the growth of clean miles driven with electric vehicles and more efficient use of renewable energy through grid storage; Bromine enables the prevention of fires starting in electronic equipment, greater fuel efficiency from rubber tires and the reduction of emissions from coal fired power plants; and the Catalysts business creates efficiency of natural resources through more usable products from a single barrel of oil, enables safer, greener production of alkylates used to produce more environmentally-friendly fuels, and reduced emissions through cleaner transportation fuels. We believe our disciplined cost reduction efforts and ongoing productivity improvements, among other factors, 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.
Third
Quarter 2022
During the third quarter of 2022:
•Our board of directors declared a quarterly dividend of $0.395 per share on July 18, 2022, which was paid on October 3, 2022 to shareholders of record at the close of business as of September 16, 2022.
•Production of spodumene concentrate from the second train at the Wodgina mine managed by our 60%-owned MARBL joint venture was achieved in July 2022.
•We announced plans to build integrated lithium operations in the United States, including the Kings Mountain, North Carolina, spodumene mine and a lithium conversion plant in the
southeast.
•We announced the conclusion of the strategic review of the Catalysts business. As a result of the review, we chose to retain the business under a separate, wholly-owned subsidiary of Albemarle. This structure is intended to allow the
Catalysts business to respond to unique customer needs and global market dynamics more effectively while also achieving its growth ambitions.
•We announced the realignment of our Lithium and Bromine global business units into a new corporate structure designed to better meet customer
needs and foster talent required to deliver in a competitive global environment. The realignment is expected to be effective January 1, 2023, and will result in the following three reportable segments: (1) Energy Storage; (2) Specialties; and (3) Catalysts.
•Our net sales for the quarter were $2.1 billion, an increase of 152% compared to net sales of $830.6 million in the third quarter of 2021.
•Diluted earnings per share was $7.61, compared to a loss of $(3.36) from the third quarter of 2021. The third quarter of 2021 included an after tax loss of $2.82 per diluted share following the settlement of an arbitration ruling for a prior legal matter.
Outlook
The
current global business environment presents a diverse set of opportunities and challenges in the markets we serve. In particular, the market for lithium battery and energy storage, particularly that for electric vehicles (“EVs”), remains strong, providing the opportunity to continue to develop high quality and innovative products while managing the high cost of expanding capacity. The other markets we serve continue to present various opportunities for value and growth as we have positioned ourselves to manage the impact on our business of changing global conditions, such as slow and uneven global growth, currency exchange volatility, crude oil price fluctuation, a dynamic pricing environment, an ever-changing landscape in electronics, the continuous need for cutting edge catalysts and technology by our refinery customers 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, optimizing and improving the value of our portfolio primarily through pricing and product development, managing costs and delivering value to our customers and shareholders. We believe that our businesses remain well-positioned to capitalize on new business opportunities and long-term trends driving growth within our end markets and to respond quickly to changes in economic conditions in these markets.
While global economic conditions have been improving, the COVID-19 pandemic continues to have an impact globally. We have not seen a material impact to our operations to date, however, the ultimate impact on our business will depend on the length and severity of the outbreak throughout the world. All of our information technology systems are running as designed and all sites are operating at normal capacity while we continue to comply with all government and health
agency recommendations and requirements, as well as protecting the safety of our employees and communities. We believe we have sufficient inventory to continue to produce at current levels, however, government mandated shutdowns could impact our ability to acquire additional materials and disrupt our customers’ purchases. At this time, we cannot predict the expected overall financial impact of the COVID-19 pandemic on our business, but we are planning for various economic scenarios and continue to make efforts to protect the safety of our employees and the health of our business.
Lithium: We expect Lithium results to be higher year-over-year for the remainder of 2022, mainly due to increased pricing as well as higher sales volume. The increased market pricing reflects tight market conditions, primarily in battery- and tech-grade carbonate and hydroxide, as well as renegotiations of certain of our long-term
agreements. Since the beginning of the year, market indices have increased 70% to 140%. Renegotiated contracts include higher prices on existing long-term agreements that are more reflective of current market conditions. In other cases, we have moved from previous fixed-priced, long-term agreements towards index-referenced and variable-priced contracts. As a result, our lithium business is more aligned with changes in market and index pricing than it has been in the past. While we expect these prices to remain strong throughout the year, a material decline in these market prices would have a negative impact on our outlook. The increased sales volume is primarily expected from new capacity coming on line from La Negra, Chile, Train 1 in Kemerton, Western Australia, and the recently completed
acquisition of Tianyuan, which includes a lithium hydroxide conversion plant designed to produce up to 25,000 metric tons of LCE per year. While we ramp up our new capacity, we will continue to utilize tolling arrangements to meet growing customer demand. EV sales are expected to continue to increase over the prior year as the lithium battery market remains strong.
We also announced agreements for strategic investments in China with plans to build two battery grade lithium conversion plants, Meishan and Zhangjiagang, each initially targeting 50,000 metric tons per year. At Meishan, construction is currently underway and is expected to be complete by the end of 2024. The Zhangjiagang plant is currently in engineering. In addition, production of spodumene concentrate from the first and second trains at the Wodgina mine managed by our 60%-owned MARBL joint venture were achieved in May and July of this year, respectively. In February
2022, we announced that we signed a non-binding letter agreement with our MARBL joint venture partner, MRL, to explore a potential expansion of the MARBL joint venture, in an effort to expand lithium conversion capacity with increased optionality and reduced risk.
On a longer-term basis, we believe that demand for lithium will continue to grow as new lithium applications advance and the use of plug-in hybrid electric vehicles and full battery electric vehicles increases. This demand for lithium is supported by a favorable backdrop of steadily declining lithium-ion battery costs, increasing battery performance, continuing significant investments in the battery
and EV supply chain by cathode and battery producers, and automotive OEM’s, favorable global public policy toward e-mobility/renewable energy usage, and additional stimulus measures taken in Europe in light of the COVID-19 pandemic that we expect to strengthen EV demand. Our outlook is also bolstered by long-term supply agreements with key strategic customers, reflecting our standing as a preferred global lithium partner, highlighted by our scale, access to geographically diverse, low-cost resources and long-term track record of reliability of supply and operating execution.
Bromine: We expect both net sales and profitability to grow 25% to 30% in 2022 due to strength in demand for fire safety solutions, as well as benefiting from diverse end markets. Volumes are expected to increase slightly compared to full year 2021 due to the successful execution of growth projects in 2021, assuming continued availability
of raw materials like chlorine. Bromine’s ongoing cost savings initiatives and higher pricing are expected to offset higher freight and raw material costs.
On a longer-term basis, 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. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. The combination of our solid, long-term business fundamentals, strong cost position, product innovations and effective management of raw material costs 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.
Catalysts: Total Catalysts results in 2022 are expected to be down 45% to 65% year-over-year as a result of inflationary pressures in freight and input costs, including the volatility of natural gas pricing in Europe related to the war in Ukraine. This is expected to be partially offset by higher pricing in refining markets. Volume is expected to grow across each of the Catalysts segments. The fluidized catalytic cracking (“FCC”) market has recovered from the COVID-19 pandemic as a result of increased travel and depletion of global gasoline inventories. Hydroprocessing catalysts (“HPC”) demand tends to be lumpier than FCC demand, but is expected to see a prolonged recovery due to refineries pushing out turnarounds. In addition, the Catalysts business is seeking contingent business interruption insurance settlements for lost income from 2019 to 2022 due to multiple
incidents at one of its customers. If we prevail with these claims, we could receive these settlements in multiple distributions in 2022 and 2023, totaling up to $53 million. We concluded the strategic review of the Catalysts business, choosing to retain the business under a separate, wholly-owned subsidiary of Albemarle. This structure is intended to better meet customer needs and foster talent required to deliver in a competitive global environment.
On a longer-term basis, we believe increased global demand for transportation fuels, new refinery start-ups and ongoing adoption of cleaner fuels will be the primary drivers of growth in our Catalysts business. We believe delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry. We also believe our technologies continue to provide significant performance and financial benefits to refiners challenged
to meet tighter regulations around the world, including those managing new contaminants present in North America tight oil, and those in the Middle East and Asia seeking to use heavier feedstock while pushing for higher propylene yields. Longer-term, we believe that the global crude supply will get heavier and more sour, a trend that bodes well for our catalysts portfolio. With superior technology and production capacities, and expected growth in end market demand, we believe that Catalysts remains well-positioned for the future. In performance catalyst solutions (“PCS”), we expect growth on a longer-term basis in our organometallics business due to growing global demand for plastics driven by rising standards of living and infrastructure spending.
Corporate: In the first quarter of 2022, we increased our quarterly dividend rate to $0.395 per share. We continue to focus on cash generation, working
capital management and process efficiencies. In addition, we expect our global effective tax rate for 2022 to continue to vary based on the locations in which income is actually earned and remains subject to potential volatility from changing legislation in the U.S., such as the Inflation Reduction Act and the CHIPS Act, and other tax jurisdictions. As of September 30, 2022, we have a valuation allowance recorded against certain foreign deferred tax assets and intend to maintain the valuation allowance until there is sufficient evidence to support its reversal. We believe there is a reasonable possibility within the next 12 months sufficient positive evidence may become available to allow us to reach a conclusion the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain foreign deferred tax assets and decrease our income tax expense for the period the
release is recorded.
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 website, www.albemarle.com. Our website is not a part of this document nor is it incorporated herein by reference.
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.
Third Quarter 2022 Compared to Third Quarter 2021
Selected Financial Data (Unaudited)
Net Sales
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Net sales
$
2,091,805
$
830,566
$
1,261,239
152
%
•$1,172.7
million of increased pricing from each of our businesses
•$135.6 million of higher sales volume in each of our businesses
•$46.8 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Gross Profit
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Gross profit
$
1,043,814
$
249,273
$
794,541
319
%
Gross
profit margin
49.9
%
30.0
%
▪Favorable pricing impacts and higher sales volume in all businesses
▪Increased utility, primarily natural gas in Europe, and freight costs in each of our businesses
▪Increased commission expenses in Chile resulting from the higher pricing in Lithium
▪2021 included $13.5 million
of out-of-period adjustment expense in Cost of goods sold to correct inventory foreign exchange values relating to prior periods
▪Unfavorable currency exchange impacts resulting from the weaker U.S. Dollar against various currencies
Selling, General and Administrative (“SG&A”) Expenses
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Selling, general and administrative expenses
$
134,479
$
103,477
$
31,002
30
%
Percentage
of Net sales
6.4
%
12.5
%
▪Higher compensation, including incentive-based, expenses across all businesses and Corporate
▪Partially offset by productivity improvements and a reduction in administrative costs
▪2022 included $1.9 million of expense primarily related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment
and $1.3 million primarily related to facility closure expenses of offices in Germany
▪2021 included $2.5 million of expenses primarily related to non-routine labor and compensation related costs that are outside normal compensation arrangements
Research and Development Expenses
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Research and development expenses
$
18,358
$
13,289
$
5,069
38
%
Percentage
of Net sales
0.9
%
1.6
%
Loss on Sale of Business/Interest in Properties
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Loss on sale of business/interest in properties
$
—
$
984
$
(984)
▪Adjustment
to the gain resulting from the sale of the FCS business on June 1, 2021, primarily due to working capital adjustments
▪Increased
debt balance during the third quarter of 2022 compared to 2021 following the issuance of $1.7 billion in new senior notes
Other Income (Expense), Net
In thousands
Q3 2022
Q3 2021
$
Change
% Change
Other income (expense), net
$
7,974
$
(643,196)
$
651,170
(101)
%
•2021 included $657.4 million of additional accrual recorded following the settlement of an arbitration ruling for a prior legal matter. See Note 10,
“Commitments and Contingencies,” for further details
•$22.8 million increase in foreign exchange losses
•2022 included a $10.6 million net gain related to the fair value adjustment of equity securities in a public company
Income Tax Expense (Benefit)
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Income tax expense (benefit)
$
196,938
$
(114,670)
$
311,608
(272)
%
Effective
income tax rate
22.7
%
22.2
%
•2022 included a benefit from global intangible low-taxed income
•Current year tax reserve related to an uncertain tax position in Chile
•Change in geographic mix of earnings
•2021 included $152.9 million tax benefit resulting from the settlement of an arbitration ruling for a prior legal matter
Equity
in Net Income of Unconsolidated Investments
In thousands
Q3 2022
Q3 2021
$ Change
% Change
Equity
in net income of unconsolidated investments
$
258,884
$
27,706
$
231,178
834
%
▪Increased earnings from strong pricing and volume increases from the Windfield Holdings Pty Ltd (“Talison”) joint venture
▪$19.9 million of favorable foreign exchange impacts from the Talison joint venture
Net
Income Attributable to Noncontrolling Interests
In thousands
Q3 2022
Q3 2021
$ Change
% Change
Net
income attributable to noncontrolling interests
$
(33,991)
$
(18,348)
$
(15,643)
85
%
▪Increase in consolidated income related to our Jordan Bromine Company Limited (“JBC”) joint venture primarily due to favorable pricing
Net Income (Loss) Attributable to Albemarle Corporation
In thousands
Q3 2022
Q3 2021
$ Change
%
Change
Net income (loss) attributable to Albemarle Corporation
$
897,215
$
(392,781)
$
1,289,996
(328)
%
Percentage of Net sales
42.9
%
(47.3)
%
Basic
earnings per share
$
7.66
$
(3.36)
$
11.02
(328)
%
Diluted earnings per share
$
7.61
$
(3.36)
$
10.97
(326)
%
▪Favorable
pricing and increased sales volume in all businesses
▪Increased earnings from Talison joint venture
▪2021 included $504.5 million, net of income taxes, of additional accrual recorded following settlement of an arbitration ruling for a legal matter
▪Productivity improvements and a reduction in administrative costs
▪Increased commission expenses in Chile resulting from the higher pricing in Lithium
▪Increased utility, primarily natural gas in Europe, and freight costs in each of our businesses
▪Increased SG&A expenses, primarily
related to increased compensation expense
▪Increased interest and financing expenses due to increased debt balances
▪2021 included $13.5 million of additional expense in Cost of goods sold to correct inventory foreign exchange values relating to prior periods
Other Comprehensive (Loss) Income, Net of Tax
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Other comprehensive (loss) income, net of tax
$
(210,172)
$
(38,409)
$
(171,763)
447
%
▪Foreign
currency translation and other
$
(200,520)
$
(39,274)
$
(161,246)
411
%
▪2022 included unfavorable movements in the Euro of approximately $119 million, the Chinese Renminbi of approximately $57 million, the Japanese Yen of approximately $8 million, the Korean Won of approximately $6 million and the Taiwanese Dollar of approximately $5 million, partially offset
by and a net favorable variance in various other currencies of less than $1 million
▪2022 included a $2.2 million gain representing an adjustment to the fair value of our available for sale debt securities
▪2021 included unfavorable movements in the Euro of approximately $29 million, the Brazilian Real of approximately $7 million and a net unfavorable variance in various other currencies of $4 million
▪Cash flow hedge
$
(9,652)
$
214
$
(9,866)
▪Interest
rate swap
$
—
$
651
$
(651)
(100)
%
Segment Information Overview.We have identified three reportable segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by the Company’s chief operating
decision maker to evaluate performance and make resource allocation decisions. Our reportable business segments consist of: (1) Lithium, (2) Bromine and (3) Catalysts. In August 2022, the Company announced plans to realign its Lithium and Bromine global business units into a new corporate structure designed to better meet customer needs and foster talent required to deliver in a competitive global environment. In addition, the Company announced its decision to retain its Catalysts business under a separate, wholly-owned subsidiary. The realignment is expected to be completed in the first quarter of 2023, and will result in the following three reportable segments: (1) Energy Storage; (2) Specialties; and (3) Catalysts. The
Company will continue to report its segments in its current structure until the new structure becomes effective.
Summarized financial information concerning our reportable segments is shown in the following tables. The “All Other” category includes only the FCS business, the sale of which was completed on June 1, 2021, that does not fit into any of our core businesses.
The Corporate category is not considered to be a segment and includes corporate-related items not allocated to the operating 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 reportable segments, All Other, and Corporate, whereas the remaining
components of pension and OPEB benefits cost or credit (“Non-operating pension and OPEB items”) are included in Corporate. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs.
Our chief operating decision maker uses adjusted EBITDA (as defined below) to assess the ongoing performance of the Company’s business segments and to allocate resources. We define adjusted EBITDA as earnings before interest and financing expenses, income tax expense, depreciation and amortization, as adjusted on a consistent basis for certain non-operating, non-
recurring or unusual items in a balanced manner and on a segment basis. These non-operating, non-recurring or unusual items may include acquisition and integration related costs, gains or losses on sales of businesses, restructuring charges, facility divestiture charges, certain litigation and arbitration costs and charges, non-operating pension and OPEB items and other significant non-recurring items. In addition, management uses adjusted EBITDA for business planning purposes and as a significant component in the calculation of performance-based compensation for management and other employees. We reported adjusted EBITDA because management believes it provides transparency to investors and enables period-to-period comparability of financial performance. Adjusted EBITDA is a financial measure that is not required by, or presented in accordance with, the generally accepted accounting principles in the United States
(“U.S. GAAP”). Adjusted EBITDA should not be considered as an alternative to Net (loss) income attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, or any other financial measure reported in accordance with U.S. GAAP.
Three
Months Ended September 30,
Percentage Change
2022
%
2021
%
2022 vs 2021
(In thousands, except percentages)
Net sales:
Lithium
$
1,501,073
71.7
%
$
359,229
43.3
%
318
%
Bromine
354,908
17.0
%
277,783
33.4
%
28
%
Catalysts
235,824
11.3
%
193,554
23.3
%
22
%
Total
net sales
$
2,091,805
100.0
%
$
830,566
100.0
%
152
%
Adjusted
EBITDA:
Lithium
$
1,111,243
93.4
%
$
125,416
57.7
%
786
%
Bromine
106,958
9.0
%
86,012
39.5
%
24
%
Catalysts
4,635
0.4
%
33,103
15.2
%
(86)
%
Corporate
(32,870)
(2.8)
%
(26,962)
(12.4)
%
(22)
%
Total
adjusted EBITDA
$
1,189,966
100.0
%
$
217,569
100.0
%
447
%
See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, from Net (loss) income attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with
U.S. GAAP (in thousands):
(a)Costs related to the acquisition, integration and potential divestitures for various significant projects, recorded in Selling, general and administrative expenses (“SG&A”).
(b)Included amounts for the three months ended September 30, 2022 recorded in:
•Cost of goods sold - $2.7 million of expense related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment.
•SG&A - $1.9 million of expense primarily related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment and $1.3 million
primarily related to facility closure expenses of offices in Germany.
•Other income, net - $10.6 million net gain related to the fair value adjustment of equity securities in a public company, a $3.0 million gain from the reversal of a liability related to a previous divestiture and $1.1 million of gain resulting from the adjustment of indemnification related to previously disposed businesses.
(c)In 2021, the Company recorded facility closure related to offices in Germany, and severance expenses in Germany and Belgium, in SG&A.
(d)Adjustments to the gain resulting from the sale of the FCS business completed on June 1, 2021.
(e)Loss
recorded in Other expense, net in the three months ended September 30, 2021 related to the settlement of an arbitration ruling for a prior legal matter. See Note 10, “Commitments and Contingencies,” for further details.
(f)Included amounts for the three months ended September 30, 2021 recorded in:
•SG&A - $2.5 million of expenses primarily related to non-routine labor and compensation related costs that are outside normal compensation arrangements.
•Other income, net - $0.1 million of a loss resulting from the adjustment of indemnification related to previously disposed businesses.
Lithium
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Net sales
$
1,501,073
$
359,229
$
1,141,844
318
%
•$1,102.0
million of favorable pricing impacts, reflecting tight market conditions, primarily in battery- and tech-grade carbonate and hydroxide, as well as greater volumes sold under index-referenced and variable-priced contracts, and mix
•$73.0 million of higher sales volume, primarily driven by increased tolling
•$33.0 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
1,111,243
$
125,416
$
985,827
786
%
•Favorable
pricing impacts and higher sales volume
•Increased equity in net income from the Talison joint venture, driven by increased pricing and sales volume
•Savings from designed productivity improvements
•Increased SG&A expenses from higher compensation and other administrative costs
•Increased utility and freight costs
•Increased spending for investments to support business growth
•Increased commission expenses in Chile resulting from the higher pricing in Lithium
•2021 included a $7.8 million
out-of-period adjustment expense recorded in Cost of goods sold to correct inventory foreign exchange values relating to prior year periods
•$12.2 million of favorable currency translation resulting from a stronger Chilean Peso
Bromine
In thousands
Q3
2022
Q3 2021
$ Change
% Change
Net sales
$
354,908
$
277,783
$
77,125
28
%
•$56.3
million of favorable pricing impacts, primarily in the fire safety solutions division
•$29.1 million of higher sales volume related to increased demand across all products
•$8.2 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
106,958
$
86,012
$
20,946
24
%
•Favorable
pricing impacts and higher sales volume as demand continues to be strong
•Increased freight costs
•Increased utility costs and raw material prices, primarily due to the higher cost of BPA
•$6.1 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
•$33.5
million of higher sales volume, primarily from the timing of clean fuel technologies sales, which has lumpier demand
•$14.3 million of favorable pricing impacts, primarily in clean fuel technologies and PCS
•$5.6 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
4,635
$
33,103
$
(28,468)
(86)
%
•Increased
utility costs, primarily natural gas in Europe
•Increased raw material and freight costs
•2021 included a $4.2 million out-of-period adjustment expense recorded in Cost of goods sold to correct inventory foreign exchange values relating to prior year periods
•Higher sales volume and favorable pricing impacts
Corporate
In
thousands
Q3 2022
Q3 2021
$ Change
% Change
Adjusted EBITDA
$
(32,870)
$
(26,962)
$
(5,908)
(22)
%
▪$2.8
million of unfavorable currency exchange impacts, including a $19.9 million increase in foreign exchange impacts from our Talison joint venture
▪$3.2 million of income in 2022 from accretion of discount in preferred equity of Grace subsidiary acquired as a portion of the proceeds of the FCS sale
▪Increase in incentive compensation costs
First Nine Months 2022 Compared to First Nine Months 2021
Selected Financial Data (Unaudited)
Net Sales
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Net sales
$
4,699,126
$
2,433,753
$
2,265,373
93
%
▪$2,070.8
million of increased pricing from each of our businesses
▪$349.5 million of higher sales volume in each of our businesses
▪$75.1 million decrease in net sales following the sale of the FCS business on June 1, 2021
▪$79.6 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Gross Profit
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Gross profit
$
2,073,268
$
761,377
$
1,311,891
172
%
Gross
profit margin
44.1
%
31.3
%
▪Favorable pricing impacts and higher sales volume in all businesses
▪Increased utility, primarily natural gas in Europe, and freight costs in each of our businesses
▪Increased commission expenses in Chile resulting from the higher pricing in Lithium
▪Decrease in net sales resulting
from the disposal of the FCS business on June 1, 2021
▪2021 included $22 million of additional production and utility costs in Bromine and Catalysts resulting from the U.S. Gulf Coast winter storm
▪2021 also included $8.7 million of out-of-period adjustment expense in Cost of goods sold to correct inventory foreign exchange values relating to prior periods
▪Unfavorable currency exchange impacts resulting from the weaker U.S. Dollar against various currencies
▪Higher
compensation, including incentive-based, expenses across all businesses and Corporate
▪Partially offset by productivity improvements and a reduction in administrative costs
▪2022 included $4.3 million of gains from the sale of legacy properties not part of our operations and $3.2 million primarily related to facility closure expenses of offices in Germany
▪2021 included a $20.0 million charitable contribution, using a portion of the proceeds received from the FCS divestiture, to the Albemarle Foundation, in addition to the normal annual contributions in 2021
▪2021 also included $8.6 million of expenses primarily related to non-routine labor and compensation related costs that
are outside normal compensation arrangements and a $4.0 million loss resulting from the sale of property, plant and equipment
Research and Development Expenses
In thousands
YTD 2022
YTD
2021
$ Change
% Change
Research and development expenses
$
51,827
$
41,901
$
9,926
24
%
Percentage of Net sales
1.1
%
1.7
%
▪Increased
research and development spend in each of the reportable segments
(Gain) Loss on Sale of Business/Interest in Properties
In thousands
YTD 2022
YTD 2021
$
Change
% Change
(Gain) loss on sale of business/interest in properties
$
8,400
$
(428,424)
$
436,824
▪2022 expense related to cost overruns for MRL’s 40% interest in lithium hydroxide conversion assets being built in Kemerton, Western Australia
▪2021
gain resulting from sale of FCS business on June 1, 2021
Interest and Financing Expenses
In thousands
YTD 2022
YTD 2021
$
Change
% Change
Interest and financing expenses
$
(98,934)
$
(56,170)
$
(42,764)
76
%
▪2022 included a $19.2 million loss on early extinguishment of debt, representing the tender premiums, fees, unamortized discounts, unamortized
deferred financing costs and accelerated amortization of the interest rate swap balance from the redemption of debt during the second quarter of 2022
▪2022 also included an expense of $17.5 million related to the correction of out of period errors regarding overstated capitalized interest values in prior periods
▪2021 included a $29.0 million loss on early extinguishment of debt, representing the tender premiums, fees, unamortized discounts and unamortized deferred financing costs from the redemption of debt during the first quarter of 2021
▪Increased debt balance during 2022 compared to 2021 following the issuance of $1.7 billion in new senior notes
Other Income (Expense), Net
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Other income (expense), net
$
32,237
$
(631,870)
$
664,107
(105)
%
•2021
included $657.4 million of additional accrual recorded following the settlement of an arbitration ruling for a prior legal matter. See Note 10, “Commitments and Contingencies,” for further details.
•2022 included a $10.6 million net gain related to the fair value adjustment of equity securities in a public company
•$5.4 million increase in income in 2022 from accretion of discount in preferred equity of the Grace subsidiary acquired as a portion of the proceeds of the FCS sale
•$21.5 million increase in foreign exchange losses
•2021 included $3.6 million of expenses primarily related to asset retirement obligation charges to update an estimate at a site formerly owned by Albemarle
•Current year tax reserve related to an uncertain tax position in Chile
•2021 included $152.9 million tax benefit resulting from an accrual recorded following an arbitration ruling related to a legacy Rockwood legal matter
•$97.5 million one-time tax expense recorded for the gain on the sale of the FCS business in 2021
•2021 included certain discrete tax benefits, partially offset by expense due to an out-of-period adjustment for an overstated deferred tax liability recorded during the three-month period ended December 31, 2017
Equity in Net Income of
Unconsolidated Investments
In thousands
YTD 2022
YTD 2021
$ Change
% Change
Equity
in net income of unconsolidated investments
$
449,476
$
62,215
$
387,261
622
%
▪Increased earnings from strong pricing and volume increases results from the Talison joint venture
▪$21.4 million of favorable foreign exchange impacts from the Talison joint venture
Net
Income Attributable to Noncontrolling Interests
In thousands
YTD 2022
YTD 2021
$ Change
%
Change
Net income attributable to noncontrolling interests
$
(95,974)
$
(61,977)
$
(33,997)
55
%
▪Increase in consolidated income related to our JBC joint venture primarily due to favorable pricing
Net Income Attributable to Albemarle Corporation
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Net income attributable to Albemarle Corporation
$
1,557,371
$
127,496
$
1,429,875
1,122
%
Percentage
of Net sales
33.1
%
5.2
%
Basic earnings per share
$
13.30
$
1.10
$
12.20
1,109
%
Diluted
earnings per share
$
13.23
$
1.10
$
12.13
1,103
%
▪Favorable pricing and increased sales volume in all businesses
▪Increased earnings from Talison joint venture
▪$504.5 million, net of income taxes, of additional accrual
recorded following the settlement of an arbitration ruling for a prior legal matter in 2021
▪2021 included a gain on sale of FCS business of $330.9 million, net of tax
▪Productivity improvements and a reduction in administrative costs
▪Increased commission expenses in Chile resulting from the higher pricing in Lithium
▪Increased utility, primarily natural gas in Europe, and freight costs in each of our businesses
▪Increased SG&A expenses, primarily related to increased compensation expense
▪Increased interest and financing
expenses due to increased debt balances
▪2021 included $13.5 million of additional expense in Cost of goods sold to correct inventory foreign exchange values relating to prior periods
▪2022 included unfavorable movements in the Euro of approximately $187 million, the Chinese Renminbi of approximately $88 million, the Japanese Yen of approximately $23 million, the Taiwanese Dollar of approximately $11 million, the South Korean Won of approximately $11 million and a net unfavorable
variance in various other currencies of less than $1 million
▪2022 included a $2.4 million loss representing an adjustment to the fair value of our available for sale debt securities
▪2021 included unfavorable movements in the Euro of approximately $40 million, the Japanese Yen of approximately $5 million, the South Korean Won of approximately $4 million and the net unfavorable variance in various other currencies of approximately $2 million, partially offset by favorable movements in the Chinese Renminbi of approximately $4 million
▪Net investment hedge
$
—
$
5,110
$
(5,110)
(100)
%
▪Cash
flow hedge
$
(8,144)
$
(563)
$
(7,581)
1,347
%
▪Interest rate swap
$
7,399
$
1,951
$
5,448
279
%
▪Accelerated
the amortization of the remaining interest rate swap balance in 2022 as a result of the repayment of the 4.15% senior notes due in 2024
Segment Information Overview.Summarized financial information concerning our reportable segments is shown in the following tables. The “All Other” category includes only the FCS business that does not fit into any of our core businesses.
Nine
Months Ended September 30,
Percentage Change
2022
%
2021
%
2022 vs 2021
(In thousands, except percentages)
Net sales:
Lithium
$
2,942,861
62.6
%
$
958,539
39.4
%
207
%
Bromine
1,092,239
23.3
%
837,978
34.4
%
30
%
Catalysts
664,026
14.1
%
562,141
23.1
%
18
%
All
Other
—
—
%
75,095
3.1
%
(100)
%
Total net sales
$
4,699,126
100.0
%
$
2,433,753
100.0
%
93
%
Adjusted
EBITDA:
Lithium
$
1,915,066
85.8
%
$
341,293
53.1
%
461
%
Bromine
371,875
16.7
%
273,298
42.6
%
36
%
Catalysts
31,337
1.4
%
79,694
12.4
%
(61)
%
All
Other
—
—
%
29,858
4.6
%
(100)
%
Corporate
(86,173)
(3.9)
%
(81,892)
(12.7)
%
(5)
%
Total
adjusted EBITDA
$
2,232,105
100.0
%
$
642,251
100.0
%
248
%
See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, from Net (loss) income attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with
U.S. GAAP, (in thousands):
Net income (loss) attributable to Albemarle Corporation
$
237,293
$
235,670
$
41,401
$
27,988
$
(414,856)
$
127,496
Depreciation
and amortization
99,559
37,628
38,293
1,870
8,415
185,765
Restructuring and other(e)
—
—
—
—
2,294
2,294
Gain
on sale of business(f)
—
—
—
—
(428,424)
(428,424)
Acquisition and integration related costs(b)
—
—
—
—
5,629
5,629
Interest
and financing expenses(c)
—
—
—
—
56,170
56,170
Income tax expense
—
—
—
—
14,422
14,422
Non-operating
pension and OPEB items
—
—
—
—
(16,407)
(16,407)
Legal accrual(g)
—
—
—
—
657,412
657,412
Albemarle
Foundation contribution(h)
—
—
—
—
20,000
20,000
Other(i)
4,441
—
—
—
13,453
17,894
Adjusted
EBITDA
$
341,293
$
273,298
$
79,694
$
29,858
$
(81,892)
$
642,251
(a)Expense
recorded as a result of revised estimates of the obligation to construct certain lithium hydroxide conversion assets in Kemerton, Western Australia, due to cost overruns from supply chain, labor and COVID-19 pandemic related issues. The corresponding obligation was recorded in Accrued liabilities to be transferred to Mineral Resources Limited (“MRL”), which maintains a 40% ownership interest in these Kemerton assets.
(b)Costs related to the acquisition, integration and potential divestitures for various significant projects, recorded in Selling, general and administrative expenses (“SG&A”).
(c)Included in Interest and financing expenses is a loss on early extinguishment of debt of $19.2 million and $29.0 million for the nine months ended September 30, 2022 and 2021,
respectively. See Note 9, “Long-term Debt,” for additional information. In addition, Interest and financing expenses for the nine months ended September 30, 2022 includes the correction of an out of period error of $17.5 million related to the overstatement of capitalized interest in prior periods. See Note 1, “Basis of Presentation,” for further details.
(d)Included amounts for the nine months ended September 30, 2022 recorded in:
•Cost of goods sold - $2.7 million of expense related to one-time retention payments for certain employees during the Catalysts strategic review and business unit realignment, and $0.5 million related to the settlement of a legal matter resulting from a prior acquisition.
•SG&A
- $3.2 million primarily related to facility closure expenses of offices in Germany, $2.8 million of charges for environmental reserves at sites not part of our operations and $1.9 million of expense primarily related to one-time retention payments for certain employees during the Catalysts strategic review, partially offset by $4.3 million of gains from the sale of legacy properties not part of our operations.
•Other income, net - $10.6 million net gain related to the fair value adjustment of equity securities in a public company, a $3.0 million gain from the reversal of a liability related to a previous divestiture, $1.1 million of gain resulting from the adjustment of indemnification related to previously disposed businesses and a $0.6 million gain related to a settlement received from a legal matter in a prior period.
(e)In 2021,
the Company recorded facility closure related to offices in Germany, and severance expenses in Germany and Belgium, in SG&A.
(f)Gain resulting from the sale of the FCS business completed on June 1, 2021.
(g)Loss recorded in Other expense, net in the three and nine months ended September 30, 2021 related to the settlement of an arbitration ruling for a prior legal matter. See Note 10, “Commitments and Contingencies,” for further details.
(h)Included in SG&A is a charitable contribution, using a portion of the proceeds received from the FCS divestiture, to the Albemarle
Foundation, a non-profit organization that sponsors grants, health and social projects, educational initiatives, disaster relief, matching gift programs, scholarships and other charitable initiatives in locations where the Company’s employees live and the Company operates. This contribution is in addition to the normal annual contribution made to the Albemarle Foundation by the Company, and is significant in size and nature in that it is intended to provide more long-term benefits in these communities.
(i)Included amounts for the nine months ended September 30, 2021 recorded in:
•SG&A - $8.6 million of expenses primarily related to non-routine labor and compensation related costs that are outside normal compensation arrangements, a $4.0 million loss resulting from the sale of property, plant and equipment and $1.6 million of charges for an environmental reserve at a site not part of our operations.
•Other income, net - $3.7 million of expenses primarily related to asset retirement obligation charges to update of an estimate at a site formerly owned by Albemarle.
Lithium
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Net sales
$
2,942,861
$
958,539
$
1,984,322
207
%
•$1,818.4
million of favorable pricing impacts, reflecting tight market conditions, primarily in battery- and tech-grade carbonate and hydroxide, as well as greater volumes sold under index-referenced and variable-priced contracts, and mix
•$218.2 million of higher sales volume, primarily driven by increased tolling
•$52.1 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
1,915,066
$
341,293
$
1,573,773
461
%
•Favorable
pricing impacts and higher sales volume
•Higher equity in net income from the Talison joint venture, driven by increased pricing and sales volume
•Savings from designed productivity improvements
•Increased SG&A expenses from higher compensation and other administrative costs
•Increased utility and freight costs
•Increased spending for investments to support business growth
•Increased commission expenses in Chile resulting from the higher pricing in Lithium
•2021 included a $4.4 million out-of-period
adjustment expense recorded in Cost of goods sold to correct inventory foreign exchange values relating to prior year periods
•$1.0 million of favorable currency translation resulting from a stronger Chilean Peso
Bromine
In thousands
YTD
2022
YTD 2021
$ Change
% Change
Net sales
$
1,092,239
$
837,978
$
254,261
30
%
•$223.4
million of favorable pricing impacts, primarily in the fire safety solutions division
•$46.6 million of higher sales volume related to increased demand across all products
•$15.7 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
371,875
$
273,298
$
98,577
36
%
•Favorable
pricing impacts and higher sales volume as demand continues to be strong
•Increased freight costs
•Increased utility costs and raw material prices, primarily due to the higher cost of BPA
•2021 included higher production and utility costs of approximately $6 million resulting from the U.S. Gulf Coast winter storm
•$14.3 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Catalysts
In
thousands
YTD 2022
YTD 2021
$ Change
% Change
Net sales
$
664,026
$
562,141
$
101,885
18
%
•$84.7
million of higher sales volume, primarily from the timing of clean fuel technologies sales, which has lumpier demand
•$28.9 million of favorable pricing impacts, primarily in clean fuel technologies and PCS
•$11.7 million of unfavorable currency translation resulting from the stronger U.S. Dollar against various currencies
Adjusted EBITDA
$
31,337
$
79,694
$
(48,357)
(61)
%
•Increased
utility costs, primarily natural gas in Europe
•Increased raw material and freight costs
•Higher sales volume and favorable pricing impacts
•2021 included higher production and utility costs of approximately $16 million resulting from the U.S. Gulf Coast winter storm
•2021 also included a $3.1 million out-of-period adjustment expense recorded in Cost of goods sold to correct inventory foreign exchange values relating to prior year periods
▪Decreased volume resulting from the sale of the FCS business in the second quarter of 2021
Adjusted EBITDA
$
—
$
29,858
$
(29,858)
(100)
%
▪Decreased
volume resulting from the sale of the FCS business in the second quarter of 2021
Corporate
In thousands
YTD 2022
YTD 2021
$
Change
% Change
Adjusted EBITDA
$
(86,173)
$
(81,892)
$
(4,281)
(5)
%
▪Increase in incentive compensation costs
▪$9.6 million of income in 2022 from accretion
of discount in preferred equity of Grace subsidiary acquired as a portion of the proceeds of the FCS sale
Financial Condition and Liquidity
Overview
The principal uses of cash in our business generally have been capital investments and resource development costs, funding working capital, and service of debt. We also make contributions to our defined benefit pension plans, pay dividends to our shareholders and have the ability to repurchase shares of our common stock. Historically, cash to fund the needs of our business has been principally provided by cash from operations, debt financing and equity issuances.
We are continually focused
on working capital efficiency particularly in the areas of accounts receivable, payables and inventory. We anticipate that cash on hand, cash provided by operating activities, proceeds from divestitures and borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations, fund capital expenditures and other investing activities, fund pension contributions and pay dividends for the foreseeable future.
Cash Flow
During the first nine months of 2022, cash on hand, cash provided by operations and the proceeds of $2.0 billion in long-term debt and credit agreements funded $815.9 million of capital expenditures for plant, machinery and equipment, the repayment of long-term debt of $455.0 million, the net repayment of $391.1 million of commercial paper and dividends to shareholders of $138.2 million. Our operations provided $955.6 million of cash flows during
the first nine months of 2022, as compared to $490.6 million for the first nine months of 2021. The change compared to prior year was primarily due to increased earnings from the Lithium and Bromine segments and higher dividends received from unconsolidated investments, partially offset by an increase in working capital of $1,460.6 million and lower earnings from the FCS business sold on June 1, 2021. The outflow from working capital in 2022 was primarily driven by increased inventory and accounts receivable balances from higher lithium pricing and increased sales, as well as the $332.5 million payment to settle a prior legal matter. This was partially offset by increased accounts payable which includes the higher pricing on lithium spodumene purchases from our Talison joint venture. Overall, our cash and cash equivalents increased by $943.5 million to $1,382.8 million at September 30,
2022 from $439.3 million at December 31, 2021.
Capital expenditures for the nine-month period ended September 30, 2022 of $815.9 million were primarily associated with plant, machinery and equipment. We expect our capital expenditures to be between $1.3 billion and $1.4 billion in 2022, primarily for Lithium growth and capacity increases, primarily in Australia, China, Chile and Silver Peak, Nevada, as well as productivity and continuity of operations projects in all segments. Our La Negra, Chile plant has completed the qualification stage and is running as expected. Train I of our Kemerton, Western Australia plant is complete and ramping through the commissioning stage. Train II has achieved mechanical completion and transitioned to the commissioning stage, with commercial sales volume from Train II expected to begin in
2023. In addition, construction of our announced lithium conversion plant in Meishan, China is progressing on schedule, with estimated completion by the end of 2024.
On May 13, 2022, we issued a series of notes (collectively, the “2022 Notes”) as follows:
•$650.0 million aggregate principal amount of senior notes, bearing interest at a rate of 4.65% payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately 4.84%. These senior notes mature on June 1, 2027.
•$600.0 million aggregate principal amount of senior notes, bearing interest at a rate of 5.05% payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately 5.18%. These senior notes mature on June 1, 2032.
•$450.0 million aggregate principal amount of senior notes, bearing interest at a rate of 5.65% payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2022. The effective interest rate on these senior notes is approximately 5.71%. These senior notes mature on June 1, 2052.
The net proceeds
from the issuance of the 2022 Notes were used to repay the balance of the commercial paper notes, the remaining balance of $425.0 million of the 2024 Notes and for general corporate purposes. The 2024 Notes were originally due to mature on December 15, 2024 and bore interest at a rate of 4.15%. During the three and six months ended September 30, 2022, we recorded a loss on early extinguishment of debt of $19.2 million in Interest and financing expenses, representing the tender premiums, fees, unamortized discounts and unamortized deferred financing costs from the redemption of the 2024 Notes. In addition, the loss on early extinguishment of debt includes the accelerated amortization of the interest rate swap associated with the 2024 Notes from Accumulated other comprehensive income.
On October
25, 2022the Company completed the acquisition of all of the outstanding equity of Guangxi Tianyuan New Energy Materials Co., Ltd. (“Tianyuan”), for approximately $200 million in cash. Tianyuan's operations include a recently constructed lithium processing plant strategically positioned near the Port of Qinzhou in Guangxi, which began commercial production in the first half of 2022. The plant has designed annual conversion capacity of up to 25,000 metric tons of LCE and is capable of producing battery-grade lithium carbonate and lithium hydroxide.
Net current assets were $1.8 billion and $119.3 million at September 30, 2022 and December 31, 2021, respectively. The increase is primarily due to increases in cash and cash equivalents
from the issuance of the 2022 Notes, as well as increased inventory and accounts receivable balances from higher lithium pricing. Additional changes in the components of net current assets are primarily due to the timing of the sale of goods and other ordinary transactions leading up to the balance sheet dates. The additional changes are not the result of any policy changes by the Company, and do not reflect any change in either the quality of our net current assets or our expectation of success in converting net working capital to cash in the ordinary course of business.
On February 24, 2022, we increased our quarterly dividend rate to $0.395 per share, an increase from the quarterly rate of $0.39 per share paid in 2021. On July 18, 2022, we
declared a cash dividend of $0.395, which was paid on October 3, 2022 to shareholders of record at the close of business as of September 16, 2022.
At September 30, 2022 and December 31, 2021, our cash and cash equivalents included $598.5 million and $374.0 million, respectively, held by our foreign subsidiaries. The majority of these foreign cash balances are associated with earnings that we have asserted are indefinitely reinvested and which we plan to use to support our continued growth plans outside the U.S. through funding of capital expenditures, acquisitions, research, operating expenses or other similar cash needs of our foreign operations.
From time to time, we repatriate cash associated with earnings from our foreign subsidiaries to the U.S. for normal operating needs through intercompany dividends, but only from subsidiaries whose earnings we have not asserted to be indefinitely reinvested or whose earnings qualify as “previously taxed income” as defined by the Internal Revenue Code. During the first nine months of 2022 and 2021, we repatriated $1.7 million and $0.9 million, respectively, of cash as part of these foreign earnings cash repatriation activities.
While we continue to closely monitor our cash generation, working capital management and capital spending in light of continuing uncertainties in the global economy, we believe that we will continue to have the financial
flexibility and capability to opportunistically fund future growth initiatives. Additionally, we anticipate that future capital spending, including business acquisitions, share repurchases and other cash outlays, should be financed primarily with cash flow provided by operations and cash on hand, with additional cash needed, if any, provided by borrowings. The amount and timing of any additional borrowings will depend on our specific cash requirements.
Our senior notes are senior unsecured obligations and rank equally with all our other senior unsecured indebtedness from time to time outstanding. The notes are effectively subordinated to all of our existing or future secured indebtedness and to the existing and future indebtedness of our subsidiaries. As is customary for such long-term debt instruments, each series of notes outstanding has terms that allow us to redeem the notes before maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of these notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued
to the date of redemption) discounted to the redemption date on a semi-annual basis using the comparable government rate (as defined in the indentures governing these notes) plus between 25 and 40 basis points, depending on the series of notes, plus, in each case, accrued interest thereon to the date of redemption. Holders may require us to purchase such notes at 101% upon a change of control triggering event, as defined in the indentures. These notes are subject to typical events of default, including bankruptcy and insolvency events, nonpayment and the acceleration of certain subsidiary indebtedness of $40 million or more caused by a nonpayment default.
Our Euro notes issued in 2019 are unsecured and unsubordinated obligations and rank equally in
right of payment to all our other unsecured senior obligations. The Euro notes are effectively subordinated to all of our existing or future secured indebtedness and to the existing and future indebtedness of our subsidiaries. As is customary for such long-term debt instruments, each series of notes outstanding has terms that allow us to redeem the notes before their maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal thereof and interest thereon (exclusive of interest accrued to, but excluding, the date of redemption) discounted to the redemption date on an annual basis using the bond rate (as defined in the indentures
governing these notes) plus between 25 and 35 basis points, depending on the series of notes, plus, in each case, accrued and unpaid interest on the principal amount being redeemed to, but excluding, the date of redemption. Holders may require us to purchase such notes at 101% upon a change of control triggering event, as defined in the indentures. These notes are subject to typical events of default, including bankruptcy and insolvency events, nonpayment and the acceleration of certain subsidiary indebtedness exceeding $100 million caused by a nonpayment default.
On October 28, 2022, we amended our revolving, unsecured credit agreement (the “2018 Credit Agreement”), which provides for borrowings of up to $1.5 billion and matures on October
28, 2027. This credit agreement was originally dated as of June 21, 2018, and was previously amended on August 14, 2019, May 11, 2020 and December 10, 2021. Borrowings under the 2018 Credit Agreement bear interest at variable rates based on a benchmark rate depending on the currency in which the loans are denominated, plus an applicable margin which ranges from 0.91% to 1.375%, depending on the Company’s credit rating from Standard & Poor’s Ratings Services LLC (“S&P”), Moody’s Investors Services, Inc. (“Moody’s”) and Fitch Ratings, Inc. (“Fitch”). With respect to loans denominated in U.S. dollars, interest is calculated using the term Secured Overnight Financing
Rate (“SOFR”) plus a term SOFR adjustment of 0.10%, plus the applicable margin. The applicable margin on the facility was 1.125% as of September 30, 2022. As of September 30, 2022 there were no borrowings outstanding under the 2018 Credit Agreement.
On August 14, 2019, the Company entered into a $1.2 billion unsecured credit facility with several banks and other financial institutions, which was amended and restated on December 15, 2020 and again on December 10, 2021 (the “2019 Credit Facility”). As of September 30, 2022, there was
$250 million outstanding under the 2019 Credit Facility. On October 24, 2022, the 2019 Credit Facility was terminated, with the outstanding balance of $250 million repaid using cash on hand.
Borrowings under the under the 2018 Credit Agreement are conditioned upon satisfaction of certain conditions precedent, including the absence of defaults. The Company is subject to one financial covenant, as well as customary affirmative and negative covenants. The financial covenant requires that the
Company’s consolidated net funded debt to consolidated EBITDA ratio (as such terms are defined in the 2018 Credit Agreement) be less than or equal to 3.50:1 for all fiscal quarters, subject to adjustments in accordance with the terms of the 2018 Credit Agreement relating to a consummation of an acquisition where the consideration includes cash proceeds from issuance of funded debt in excess of $500 million. The 2018 Credit Agreement also contains customary default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants and cross-defaults to other material indebtedness. The occurrence of an event of default under the 2018 Credit Agreement could result in all loans and other obligations becoming immediately due and payable and the 2018 Credit Agreement being terminated.
On May 29, 2013, we entered
into agreements to initiate a commercial paper program on a private placement basis under which we may issue unsecured commercial paper notes (the “Commercial Paper Notes”) from time-to-time up to a maximum aggregate principal amount outstanding at any time of $750.0 million. The proceeds from the issuance of the Commercial Paper Notes are expected to be used for general corporate purposes, including the repayment of other debt of the Company. The 2018 Credit Agreement is available to repay the Commercial Paper Notes, if necessary. Aggregate borrowings outstanding under the 2018 Credit Agreement and the Commercial Paper Notes will not exceed the $1.5 billion current maximum amount available under the 2018 Credit Agreement. The Commercial Paper Notes will be sold at a discount from par, or alternatively, will be sold at par and bear interest at rates that will vary based upon market
conditions at the time of issuance. The maturities of the Commercial Paper Notes will vary but may not exceed 397 days from the date of issue. The definitive documents relating to the commercial paper program contain customary representations, warranties, default and indemnification provisions. There were no Commercial Paper Notes outstanding at September 30, 2022.
The non-current portion of our long-term debt amounted to $3.1 billion at September 30, 2022, compared to $2.0 billion at December 31, 2021. In addition, at September 30, 2022, we had availability to borrow $1.5 billion under our commercial paper program and the 2018 Credit Agreement, and $238.6 million under other existing lines of credit, subject to the financial covenant
under the 2018 Credit Agreement. We have the ability and intent to refinance our borrowings under our other existing lines of credit with borrowings under the 2018 Credit Agreement, as applicable. Therefore, the amounts outstanding under those lines of credit, if any, are classified as long-term debt. We believe that at September 30, 2022 we were, and that we currently are, in compliance with all of our long-term debt covenants.
Off-Balance Sheet Arrangements
In the ordinary course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, including bank guarantees and letters of credit, which totaled approximately $130.0 million at September 30, 2022. None of these off-balance sheet arrangements has had, or is likely to have, a material effect
on our current or future financial condition, results of operations, liquidity or capital resources.
Other Obligations
Our contractual obligations have not significantly changed, based on our ordinary business activities and projected capital expenditures noted above, from the information we provided in our Annual Report on Form 10-K for the year ended December 31, 2021, with the exception of the debt issued and repaid in the second quarter of 2022, as noted above. Following the debt issuance and repayments, our annual maturities of long-term debt at September 30, 2022 and our expected interest payment on those long-term debt obligations are as follows (in millions):
Maturities
of Long-term Debt
Expected Interest Payments
Remainder of 2022
$
251.2
$
69.9
2023
—
124.5
2024
—
124.5
2025
361.8
124.1
2026
—
119.8
Thereafter
2,786.1
1,200.8
Total
expected 2022 contributions to our domestic and foreign qualified and nonqualified pension plans, including the Albemarle Corporation Supplemental Executive Retirement Plan, are expected to approximate $12 million. We may choose to make additional pension contributions in excess of this amount. We have made contributions of $8.9 million to our domestic and foreign pension plans (both qualified and nonqualified) during the nine-month period ended September 30, 2022.
The liability related to uncertain tax positions, including interest and penalties, recorded in Other noncurrent liabilities totaled $46.6 million
at September 30, 2022 and $27.7 million at December 31, 2021. Related assets for corresponding offsetting benefits recorded in Other assets totaled $32.1 million at September 30, 2022 and $32.9 million at December 31, 2021. We cannot estimate the amounts of any cash payments associated with these liabilities for the remainder of 2022 or the next twelve months, and we are unable to estimate the timing of any such cash payments in the future at this time.
We are subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection
of the environment. To our knowledge, we are currently complying, and expect to continue to comply, in all material respects with applicable environmental laws, regulations, statutes and ordinances. Compliance with existing federal, state, local and foreign environmental protection laws is not expected to have a material effect on capital expenditures, earnings or our competitive position, but the costs associated with increased legal or regulatory requirements could have an adverse effect on our operating results.
Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a potentially responsible party (“PRP”), and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in cases in which we may have liability as a PRP, our liability for our share of cleanup is de
minimis. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not have a material adverse effect upon our results of operations or financial condition.
Liquidity Outlook
We anticipate that cash on hand and cash provided
by operating activities, divestitures and borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations, fund any capital expenditures and share repurchases, make acquisitions, make pension contributions and pay dividends for the foreseeable future. Our main focus during the continued uncertainty surrounding the global economy, including caused by the ongoing COVID-19 pandemic, is to continue to maintain financial flexibility by continuing our cost savings initiative, while still protecting our employees and customers, committing to shareholder returns and maintaining an investment grade rating. Over the next three years, in terms of uses of cash, we will continue to invest in growth of the businesses and return value to shareholders. Additionally, we will continue to evaluate the merits of any opportunities that may arise for acquisitions of businesses or assets, which may require additional liquidity.
Our
growth investments include the recently completed acquisition all of the outstanding equity of Tianyuan for approximately $200 million in cash. Tianyuan's operations include a recently constructed lithium processing plant that has designed annual conversion capacity of up to 25,000 metric tons of LCE and is capable of producing battery-grade lithium carbonate and lithium hydroxide. In addition, we announced agreements for strategic investments in China with plans to build two battery grade lithium conversion plants, Meishan and Zhangjiagang, each initially targeting 50,000 metric tons per year. At Meishan, construction is currently underway and is expected to be complete by the end of 2024. The Zhangjiagang plant is currently in engineering.
In October 2022, the Company announced it has been awarded a nearly $150 million grant from the U.S.
Department of Energy to expand domestic manufacturing of batteries for EVs and the electrical grid and for materials and components currently imported from other countries. The grant funding is intended to support a portion of the anticipated cost to construct a new, commercial-scale U.S.-based lithium concentrator facility at our Kings Mountain, North Carolina, location. We expect the concentrator facility to create hundreds of construction and full-time jobs, and to supply up to 350,000 metric tons per year of spodumene concentrate to the company's previously announced mega-flex lithium conversion facility.
Our cash flows from operations may be negatively affected by adverse consequences to our customers and the markets in which we compete as a result of moderating global economic conditions and reduced capital availability. The COVID-19
pandemic has not had a material impact on our liquidity to date; however, we cannot predict the overall impact in terms of cash flow generation as that will depend on the length and severity of the outbreak and its impact. As a result, we are planning for various economic scenarios and actively monitoring our balance sheet to maintain the financial flexibility needed.
Although we maintain business relationships with a diverse group of financial institutions as sources of financing, an adverse change in their credit standing could lead them to not honor their contractual credit commitments to us, decline funding under our existing but uncommitted lines of credit with them, not renew their extensions of credit or not provide new financing to us. While the global corporate bond and bank loan markets remain strong, periods of elevated uncertainty related to the
COVID-19 pandemic or global economic and/or geopolitical concerns may limit efficient access to such markets for extended periods of time. If such concerns heighten, we may incur increased borrowing costs and reduced credit capacity as our various credit facilities mature. If the U.S. Federal Reserve or similar national reserve banks in other countries decide to tighten the monetary supply in response, for example, to improving economic conditions, we may incur increased borrowing costs (as interest rates increase on our variable rate credit facilities, as our various credit facilities mature or as we refinance any maturing fixed rate debt obligations), although these cost increases would be partially offset by increased income rates on portions of our cash deposits.
On February 6, 2017, Huntsman, a subsidiary
of Huntsman Corporation, filed a lawsuit in New York state court against Rockwood, Rockwood Specialties, Inc., certain former executives of Rockwood and its subsidiaries, Seifollah Ghasemi, Thomas Riordan, Andrew Ross, and Michael Valente, and Albemarle. The lawsuit arises out of Huntsman’s acquisition of certain Rockwood subsidiaries in connection with a stock purchase agreement (the “SPA”), dated September 17, 2013. Before that transaction closed on October 1, 2014, Albemarle began discussions with Rockwood to purchase all outstanding equity of Rockwood and did so in a transaction that closed on January 12, 2015. Huntsman’s complaint
asserted that certain technology that Rockwood had developed for a production facility in Augusta, Georgia, and which was among the assets that Huntsman acquired pursuant to the SPA, did not work, and that Rockwood and the defendant executives had intentionally misled Huntsman about that technology in connection with the Huntsman-Rockwood transaction. The complaint asserted claims for, among other things, fraud, negligent misrepresentation, and breach of the SPA, and sought certain costs for completing construction of the production facility.
On March 10, 2017, Albemarle moved in New York state court to compel arbitration, which was granted on January 8, 2018 (although Huntsman unsuccessfully appealed that decision). Huntsman’s arbitration demand asserted claims substantially similar to those asserted in its state court complaint,
and sought various forms of legal remedies, including cost overruns, compensatory damages, expectation damages, punitive damages, and restitution. After a trial, the arbitration panel issued an award on October 28, 2021, awarding approximately $600 million (including interest) to be paid by Albemarle to Huntsman, in addition to the possibility of attorney’s fees, costs and expenses. Following the arbitration panel decision, Albemarle reached a settlement with Huntsman to pay $665 million in two equal installments, with the first payment made in December 2021. The second and final payment was made in May 2022.
In addition, as first reported in 2018, following receipt of information regarding potential improper payments being made by third-party sales representatives of our Refining Solutions business, within our Catalysts segment, we promptly retained outside counsel and forensic
accountants to investigate potential violations of our Code of Conduct, the Foreign Corrupt Practices Act, and other potentially applicable laws. Based on this internal investigation, we have voluntarily self-reported potential issues relating to the use of third-party sales representatives in our Refining Solutions business, within our Catalysts segment, to the DOJ, the SEC, and the DPP, and are cooperating with the DOJ, the SEC, and the DPP in their review of these matters. In connection with our internal investigation, we have implemented, and are continuing to implement, appropriate remedial measures. We have commenced discussions with the SEC, DOJ and DPP about a potential resolution of these matters.
At this time, we are unable to predict the duration, scope, result, or related costs associated with the investigations. We also are unable to predict what action may be taken by the DOJ, the SEC, or the DPP, or what penalties
or remedial actions they may ultimately seek. Any determination that our operations or activities are not, or were not, in compliance with existing laws or regulations could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses. We do not believe, however, that any such fines, penalties, disgorgement, equitable relief, or other losses would have a material adverse effect on our financial condition or liquidity. However, an adverse resolution could have a material adverse effect on our results of operations in a particular period.
Overall, with generally strong cash-generative businesses and no significant long-term debt maturities before 2025, we believe we have, and will be able to maintain, a solid liquidity position.
We had cash and cash equivalents totaling $1,382.8 million at September 30,
2022, of which $598.5 million is held by our foreign subsidiaries. This cash represents an important source of our liquidity and is invested in bank accounts or money market investments with no limitations on access. The cash held by our foreign subsidiaries is intended for use outside of the U.S. We anticipate that any needs for liquidity within the U.S. in excess of our cash held in the U.S. can be readily satisfied with borrowings under our existing U.S. credit facilities or our commercial paper program.
Guarantor Financial Information
Albemarle Wodgina Pty Ltd Issued Notes
Albemarle Wodgina Pty Ltd (the “Issuer”), a wholly owned subsidiary of
Albemarle Corporation, issued $300.0 million aggregate principal amount of 3.45% Senior Notes due 2029 (the “3.45% Senior Notes”) in November 2019. The 3.45% Senior
Notes are fully and unconditionally guaranteed (the “Guarantee”) on a senior unsecured basis by Albemarle Corporation (the “Parent Guarantor”). No direct or indirect subsidiaries of the Parent Guarantor guarantee the 3.45% Senior Notes (such subsidiaries are referred to as the “Non-Guarantors”).
In
2019, we completed the acquisition of a 60% interest in MRL’s Wodgina hard rock lithium mine project (“Wodgina Project”) in Western Australia and formed an unincorporated joint venture with MRL, named MARBL Lithium Joint Venture, for the exploration, development, mining, processing and production of lithium and other minerals (other than iron ore and tantalum) from the Wodgina spodumene mine and for the operation of the Kemerton assets in Western Australia. We participate in the Wodgina Project through our ownership interest in the Issuer.
The Parent Guarantor conducts its U.S. Bromine and Catalysts operations directly, and conducts its other operations (other than operations conducted through the Issuer) through the Non-Guarantors.
The 3.45% Senior Notes are the Issuer’s senior unsecured obligations and rank equally in right of payment to the senior indebtedness of the
Issuer, effectively subordinated to all of the secured indebtedness of the Issuer, to the extent of the value of the assets securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities of its subsidiaries. The Guarantee is the senior unsecured obligation of the Parent Guarantor and ranks equally in right of payment to the senior indebtedness of the Parent Guarantor, effectively subordinated to the secured debt of the Parent Guarantor to the extent of the value of the assets securing the indebtedness and structurally subordinated to all indebtedness and other liabilities of its subsidiaries.
For cash management purposes, the Parent Guarantor transfers cash among itself, the Issuer and the Non-Guarantors through
intercompany financing arrangements, contributions or declaration of dividends between the respective parent and its subsidiaries. The transfer of cash under these activities facilitates the ability of the recipient to make specified third-party payments for principal and interest on the Issuer and/or the Parent Guarantor’s outstanding debt, common stock dividends and common stock repurchases. There are no significant restrictions on the ability of the Issuer or the Parent Guarantor to obtain funds from subsidiaries by dividend or loan.
The following tables present summarized financial information for the Parent Guarantor and the Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the Issuer and the
Parent Guarantor and (ii) equity in earnings from and investments in any subsidiary that is a Non-Guarantor. Each entity in the combined financial information follows the same accounting policies as described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021.
Loss before income taxes and equity in net income of unconsolidated investments(b)(c)
(148,197)
(607,995)
Net
loss attributable to the Parent Guarantor and the Issuer
(295,874)
(558,342)
(a) Includes net sales to Non-Guarantors of $1.7 billion and $715.6 million for the nine months endedSeptember 30, 2022 and year ended December 31, 2021, respectively.
(b) Includes intergroup expenses to Non-Guarantors of $97.7 million and $114.3 million for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively.
(c) The
year ended December 31, 2021 includes the Parent Guarantor’s portion of the gain on sale of the FCS business on June 1, 2021 and the loss for the settlement of an arbitration ruling for a prior legal matter. In addition, includes Issuer’s loss related to cost overruns for MRL’s 40% interest in lithium hydroxide conversion assets being built in Kemerton.
(c) Includes noncurrent payables to Non-Guarantors of $6.7 billion and $6.5 billion
at September 30, 2022 and December 31, 2021, respectively.
The 3.45% Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantors. The Non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the 3.45% Senior Notes or the Indenture under which the 3.45% Senior Notes were issued, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that the Parent Guarantor has to receive any assets of any of the Non-Guarantors upon the liquidation or reorganization of any Non-Guarantor, and the consequent rights of holders of
the 3.45% Senior Notes to realize proceeds from the sale of any of a Non-Guarantor’s assets, would be effectively subordinated to the claims of such Non-Guarantor’s creditors, including trade creditors and holders of preferred equity interests, if any, of such Non-Guarantor. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the Non-Guarantors, the Non-Guarantors will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to the Parent Guarantor.
The 3.45% Senior Notes are obligations of the Issuer. The Issuer’s cash flow and ability to make payments on the 3.45% Senior Notes could be dependent upon the earnings it derives from the production from MARBL for the Wodgina Project. Absent income received from sales of its share of production from MARBL,
the Issuer’s ability to service the 3.45% Senior Notes could be dependent upon the earnings of the Parent Guarantor’s subsidiaries and other joint ventures and the payment of those earnings to the Issuer in the form of equity, loans or advances and through repayment of loans or advances from the Issuer.
The Issuer’s obligations in respect of MARBL are guaranteed by the Parent Guarantor. Further, under MARBL pursuant to a deed of cross security between the Issuer, the joint venture partner and the manager of the project (the “Manager”), each of the Issuer, and the joint venture partner have granted security to each other and the Manager for the obligations each of the Issuer and the joint venture partner have to each other and to the Manager. The claims of the joint venture partner, the Manager
and other secured creditors of the Issuer will have priority as to the assets of the Issuer over the claims of holders of the 3.45% Senior Notes.
Albemarle Corporation Issued Notes
In March 2021, Albemarle New Holding GmbH (the “Subsidiary Guarantor”), a wholly owned subsidiary of Albemarle Corporation, added a full and unconditional guarantee (the “Upstream Guarantee”) to all securities of Albemarle Corporation (the “Parent Issuer”) issued and outstanding as of such date and, subject to the terms of the applicable amendment or supplement, securities issuable by the Parent Issuer pursuant to the Indenture, dated as of January 20, 2005, as amended and supplemented from time to time (the “Indenture”).
No other direct or indirect subsidiaries of the Parent Issuer guarantee these securities (such subsidiaries are referred to as the “Upstream Non-Guarantors”). See Long-term debt section above for a description of the securities issued by the Parent Issuer.
The current securities outstanding under the Indenture, with the exception of the 2022 Notes, are the Parent Issuer’s unsecured and unsubordinated obligations and rank equally in right of payment with all other unsecured and unsubordinated indebtedness. The 2022 Notes are the Parent Issuer’s general senior unsecured obligations, ranking equally in right of payment with all of the Parent Issuer’s existing
and future senior unsecured indebtedness and senior to the Parent Issuer’s future subordinated indebtedness. The 2022 Notes are effectively subordinated to the Parent Issuer’s existing and future secured indebtedness to the extent of the value of the assets securing that indebtedness and to the existing and future indebtedness and
other liabilities of the Parent Issuer’s subsidiaries, including the Subsidiary Guarantor. With respect to any series of securities issued under the Indenture
that is subject to the Upstream Guarantee (which series of securities does not include the 2022 Notes), the Upstream Guarantee is, and will be, an unsecured and unsubordinated obligation of the Subsidiary Guarantor, ranking pari passu with all other existing and future unsubordinated and unsecured indebtedness of the Subsidiary Guarantor.
For cash management purposes, the Parent Issuer transfers cash among itself, the Subsidiary Guarantor and the Upstream Non-Guarantors through intercompany financing arrangements, contributions or declaration of dividends between the respective parent and its subsidiaries. The transfer of cash under these activities facilitates the ability of the recipient to make specified third-party payments for principal and interest on the Parent Issuer and/or the Subsidiary Guarantor’s outstanding debt, common
stock dividends and common stock repurchases. There are no significant restrictions on the ability of the Parent Issuer or the Subsidiary Guarantor to obtain funds from subsidiaries by dividend or loan.
The following tables present summarized financial information for the Subsidiary Guarantor and the Parent Issuer on a combined basis after elimination of (i) intercompany transactions and balances among the Parent Issuer and the Subsidiary Guarantor and (ii) equity in earnings from and investments in any subsidiary that is an Upstream Non-Guarantor. Each entity in the combined financial information follows the same accounting policies as described herein and in the Company’s Annual Report on Form 10-K for the year ended December
31, 2021.
Loss before income taxes and equity in net income of unconsolidated investments(b)
(262,449)
(368,737)
Loss attributable to the Subsidiary Guarantor and the Parent Issuer(c)
(438,496)
(320,726)
(a) Includes
net sales to Non-Guarantors of $1.5 billion and $715.6 million for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively.
(b) Includes intergroup expenses to Non-Guarantors of $67.6 million and $17.8 million for the nine months ended September 30, 2022 and year ended December 31, 2021, respectively.
(c) The year ended December 31, 2021 includes the Parent Issuer’s portion of gain on sale of the FCS business on June 1, 2021 and the loss for the settlement of an arbitration ruling for a prior legal matter.
(d) Includes noncurrent payables to Non-Guarantors of $5.8 billion and $5.8 billion at September 30, 2022 and December 31, 2021, respectively.
These securities are structurally subordinated to the indebtedness and other liabilities of the Upstream Non-Guarantors. The Upstream Non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due
pursuant to these securities or the Indenture under which these securities were issued, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that the Subsidiary Guarantor has to
receive any assets of any of the Upstream Non-Guarantors upon the liquidation or reorganization of any Upstream Non-Guarantors, and the consequent rights of holders of these securities to realize proceeds from the sale of any of an Upstream Non-Guarantor’s assets, would be effectively subordinated to the claims of such Upstream Non-Guarantor’s
creditors, including trade creditors and holders of preferred equity interests, if any, of such Upstream Non-Guarantor. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the Upstream Non-Guarantors, the Upstream Non-Guarantors will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to the Subsidiary Guarantor.
Summary of Critical Accounting Policies and Estimates
There have been no significant changes in our critical accounting policies and estimates from the information we provided in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
For
a description of recent accounting pronouncements, see Item 1 Financial Statements – Note 19, “Recently Issued Accounting Pronouncements” to the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant changes in our interest rate risk, foreign currency exchange rate exposure, marketable securities price risk or raw material price risk from the information we provided
in our Annual Report on Form 10-K for the year ended December 31, 2021, except as noted below.
During the first quarter of 2021, we repaid the remaining principal balance of our 1.875% Euro-denominated senior notes. Prior to this repayment, the carrying value these notes was designated as an effective hedge of our net investment in certain foreign subsidiaries where the Euro serves as the functional currency, and gains or losses on the revaluation of these senior notes to our reporting currency were recorded in accumulated other comprehensive loss. Upon repayment of these notes, this net investment hedge was discontinued. The balance of foreign exchange revaluation gains and losses associated with this discontinued net investment hedge will remain within accumulated other comprehensive
loss until the hedged net investment is sold or liquidated.
We had variable interest rate borrowings of $264.0 million outstanding at September 30, 2022, bearing a weighted average interest rate of 3.97% and representing 8% of our total outstanding debt. A hypothetical 100 basis point increase in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $2.6 million as of September 30, 2022. We may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.
Our financial instruments, which are subject to foreign currency exchange risk, consist of foreign currency forward contracts
with an aggregate notional value of $2,159.3 million and with a fair value representing a net asset position of $4.3 million at September 30, 2022. Fluctuations in the value of these contracts are generally offset by the value of the underlying exposures being hedged. We conducted a sensitivity analysis on the fair value of our foreign currency hedge portfolio assuming an instantaneous 10% change in select foreign currency exchange rates from their levels as of September 30, 2022, with all other variables held constant. A 10% appreciation of the U.S. Dollar against foreign currencies that we hedge would result in a decrease of approximately $0.7 million in the fair value of our foreign currency forward contracts.
A 10% depreciation of the U.S. Dollar against these foreign currencies would result in a decrease of approximately $17.1 million in the fair value of our foreign currency forward contracts. The sensitivity of the fair value of our foreign currency hedge portfolio represents changes in fair values estimated based on market conditions as of September 30, 2022, without reflecting the effects of underlying anticipated transactions. When those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on our earnings and cash flows in future periods.
Item 4.
Controls
and Procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the third quarter ended September 30, 2022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal
Proceedings.
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. Additional information with respect to this Item 1 is contained in Note 10 to the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Item 1A.
Risk
Factors.
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. The risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 describe some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Interactive Data File (Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 2022, furnished in XBRL (eXtensible Business Reporting Language)).
#
Management contract
or compensatory plan or arrangement.
*
Included with this filing.
Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements of Income for the nine months ended September 30, 2022 and 2021, (ii) the Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2022 and 2021, (iii) the Consolidated Balance Sheets at September 30, 2022 and December 31, 2021, (iv) the Consolidated Statements of Changes in Equity for the
nine months ended September 30, 2022 and 2021, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 and (vi) the Notes to the Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.