Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

Some of the information presented in this Annual Report on Form 10-K, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “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. Therefore, there can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:

•changes in economic and business conditions;
•changes in financial and operating performance of our major customers and industries and markets served by us;
•the timing of orders received from customers;
•the gain or loss of significant customers;
•competition from other manufacturers;
•changes in the demand for our products or the end-user markets in which our products are sold;
•limitations or prohibitions on the manufacture and sale of our products;
•availability of raw materials;
•increases in the cost of raw materials and energy, and our ability to pass through such increases;
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•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 proceedings, claims or litigation;
•the occurrence of cyber-security breaches, terrorist attacks, industrial accidents, natural disasters or climate change;
•hazards associated with chemicals manufacturing;
•the inability to maintain current levels of product or premises liability insurance or the denial of such coverage;
•political unrest affecting the global economy, including adverse effects from terrorism or hostilities;
•political instability affecting our manufacturing operations or joint ventures;
•changes in accounting standards;
•the inability to achieve results from our global manufacturing cost reduction initiatives as well as our ongoing continuous improvement and rationalization programs;
•changes in the jurisdictional mix of our earnings and changes in tax laws and rates;
•changes in monetary policies, inflation or interest rates that may impact our ability to raise capital or increase our cost of funds, impact the performance of our pension fund investments and increase our pension expense and funding obligations;
•volatility and uncertainties in the debt and equity markets;
•technology or intellectual property infringement, including cyber-security breaches, and other innovation risks;
•decisions we may make in the future;
•the ability to successfully execute, operate and integrate acquisitions and divestitures; and
•the other factors detailed from time to time in the reports we file with the SEC.

We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Annual Report on Form 10-K.

The following is a discussion and analysis of results of operations for the years ended December 31, 2016, 2015 and 2014. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 49.

Overview

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that meets customer needs across an exceptionally diverse range of end markets. The end markets we serve include the petroleum refining, consumer electronics, energy storage, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety and custom chemistry services. We believe that our commercial and geographic diversity, technical expertise, innovative capability, flexible, low-cost global manufacturing base, experienced management team and strategic focus on our core base technologies will enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.

Secular trends favorably impacting demand within the end markets that we serve combined with our diverse product portfolio, broad geographic presence and customer-focused solutions will continue to be key drivers to our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace. We believe our disciplined cost reduction efforts, ongoing productivity improvements 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.

2016 Highlights

•In the first quarter, we increased our quarterly dividend for the 22nd consecutive year, to $0.305 per share.
•Effective January 1, 2016, our former Performance Chemicals reportable segment was split into two separate reportable segments: (1) Lithium and Advanced Materials and (2) Bromine Specialties. This split did not affect the existing Refining Solutions reportable segment.
•On January 4, 2016, we closed the sale of the metal sulfides business for cash proceeds of approximately $137 million and recorded a gain of $11.5 million before income taxes in 2016 related to the sale.
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•On February 1, 2016, we closed the sale of the minerals-based flame retardants and specialty chemicals business for cash proceeds of approximately $187 million and recorded a gain of $112.3 million before income taxes in 2016 related to the sale.
•We were granted approval by the Environmental Assessment Commission of the Antofagasta Region to increase our currently authorized lithium brine extraction rate at the Company's facility in the Salar de Atacama, Chile.
•We amended our lithium production rights agreement with the Chilean Economic Development Agency (“CORFO”) to provide us with sufficient lithium to support the production of technical and battery grade lithium carbonate and lithium chloride over a 27-year period at our expanding battery grade manufacturing facilities in La Negra, Antofagasta.
•We announced that we are discontinuing production of hexabromocyclododecane (“HBCD”)-based flame retardants to focus on supplying GreenCrest® polymeric fire safety solutions, a sustainable alternative to HBCD.
•We relocated our corporate and principle executive headquarters from Baton Rouge, LA to Charlotte, NC.
•We entered an agreement with Bolland Minera S.A., for the exclusive exploration and acquisition rights to a lithium resource in Antofalla, within the Catamarca Province of Argentina.
•We announced that Tianqi Lithium Corporation (“Tianqi”) gave notice of its decision to exercise an option to acquire a 20% indirect ownership interest in Rockwood Lithium GmbH, a wholly-owned German subsidiary of Albemarle, and its subsidiaries. In February 2017, we announced that Albemarle and Tianqi terminated the option agreement, and as a result we will retain 100% of the ownership interest in Rockwood Lithium GmbH.
•On December 14, 2016, we completed the sale of the Chemetall Surface Treatment business to BASF SE for cash proceeds of approximately $3.1 billion, net of purchase price adjustments, and recorded an after-tax gain of $135.0 million in 2016 related to the sale.
•We repaid the $1.25 billion September 2015 Term Loan Agreement in full, primarily with proceeds from the sales of the Chemetall Surface Treatment business, the metal sulfides business and the minerals-based flame retardants and specialty chemicals business.
•On December 31, 2016, we completed the acquisition of the lithium hydroxide and lithium carbonate conversion business of Jiangxi Jiangli New Materials Science and Technology Co. Ltd. for a purchase price of approximately $145 million.
•We achieved earnings from continuing operations of $478.6 million during 2016 as compared to $327.6 million for 2015. Cash flows from operations in 2016 were $733.4 million. Earnings from continuing operations for 2016 includes pension and other postretirement benefit (“OPEB”) actuarial losses of $18.3 million after income taxes, compared to pension and OPEB actuarial gains of $21.4 million after income taxes in 2015.

Outlook

The current global business environment presents a diverse set of opportunities and challenges in the markets we serve, from slow and uneven global growth, currency exchange volatility, significantly low crude oil prices, a dynamic pricing environment in bromine derivatives and an ever-changing landscape in electronics, to the continuous need for cutting edge catalysts and technology by our refinery customers, diverse energy storage needs including exciting opportunities in electric vehicles, and increasingly stringent environmental standards. Amidst these dynamics, we believe our business fundamentals are sound and that we are strategically well-positioned as we remain focused on increasing sales volumes, significant deleveraging, optimizing and improving the value of our portfolio through pricing and product development, managing costs and delivering value to our customers. We believe that our businesses remain positioned to capitalize on new business opportunities and long-term trends driving growth within our end markets and to respond quickly to improved economic conditions. Additionally, we achieved our goal regarding synergies from the acquisition of the Rockwood businesses.

On December 14, 2016, we completed the sale of the Chemetall Surface Treatment business to BASF SE for cash proceeds of approximately $3.1 billion, net of purchase price adjustments. A portion of the proceeds have been used to reduce leverage, while the remaining proceeds are expected to be used to invest in growth of the remaining businesses and to return capital to shareholders.

Lithium and Advanced Materials: We expect continued strong growth in 2017, led by demand in battery-grade applications and continued price improvement in Lithium. PCS experienced weaker profitability in 2016 due to weakness in the curatives market and the bankruptcy filing of one of our customers which resulted in a $10 million impact to Income from continuing operations before income taxes and adjusted EBITDA during the year. While we expect further negative impacts from the bankruptcy filing in 2017, we expect PCS profitability to stabilize in 2017 due to productivity gains and increased volumes due to market demand, offset slightly by unfavorable pricing due to excess supply.

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On a longer term basis, we believe that demand for lithium will continue to grow as new applications for lithium power continue to be developed and the use of plug-in hybrid electric vehicles and battery electric vehicles escalates. In addition, we expect growth in PCS from growing global demand for plastics driven by rising standards of living and infrastructure spending, particularly in Asia and the Middle East.

Bromine Specialties: The Bromine Specialties business had a solid 2016, with the lack of the methyl bromide product net sales more than offset by volume growth in fire safety and other derivatives, as well as lower variable costs. We expect to see relatively flat growth on net sales and profitability in 2017. With sustained low oil prices, we expect stable, albeit low, drilling completion fluid demand throughout the year. While it is possible oil prices could rebound some in 2017, the short-term impact will be to raw material cost. Offshore well completions lag oil pricing, which would likely extend beyond 2017. We are expecting relatively stable fire safety and other derivative net sales and profits in 2017.

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. Absent an increase in regulatory pressure on offshore drilling, we would expect this business to follow a long-term growth trajectory once oil prices recover from recent levels as we expect that deep water drilling will continue to increase around the world. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. We believe the global supply/demand gap could tighten as demand for existing and possible new uses of bromine expands over time. The combination of solid, long-term business fundamentals, with our 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.

Refining Solutions: Following the downturn in 2015 (primarily caused by cash preservation measures from oil companies, triggered by oil price volatility), in 2016 we saw a significant increase in the number of “Hydro treating unit” catalyst change-outs and related catalyst demand. In addition to catalyst demand increase, we also saw a marked improvement in catalyst product mix year over year. Despite ongoing uncertainty of oil prices and the ensuing impact on crude slates used by refiners and resulting demand for catalysts, we expect sustained performance in our clean fuels technology business driven by refining change-outs and balanced product mix. We also expect solid performance from our heavy oil upgrading division despite a number of scheduled maintenance shutdowns and plant turnarounds at refiners, which could dampen heavy oil upgrading demand in 2017. We also anticipate headwinds from rising raw material costs in 2017 following historically low prices in 2016.

On a longer term basis, we believe increased global demand for transportation fuels from a growing population and increasing mobility and the implementation of more stringent fuel quality requirements will drive growth in our Refining Solutions business. Delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry, and we believe our technologies continue to provide significant performance and financial benefits to refiners challenged to meet tighter regulations around the world, those managing new contaminants present in North America tight oil, and those in the Middle 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 Refining Solutions remains well-positioned for the future.

All Other: During the first quarter of 2016, we closed the previously announced sales of the metal sulfides business and the minerals-based flame retardants and specialty chemicals business. The cash generated from the sale of these businesses was used to reduce borrowings outstanding under the September 2015 Term Loan Agreement. In April 2016, we concluded that we would suspend efforts to sell the fine chemistry services business. This business will continue to be reported outside the Company’s reportable segments. We expect the next few years to be a challenging for fine chemistry services due to a challenging agriculture industry environment, as well as customer order timing in pharmaceuticals.

Corporate: In the first quarter of 2017, we increased our quarterly dividend rate to $0.32 per share. We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2017 to be approximately 22.0%; however, our rate will vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in the United States and other tax jurisdictions.

Actuarial gains and losses related to our defined benefit pension and OPEB plan obligations are reflected in Corporate as a component of non-operating pension and OPEB plan costs under mark-to-market accounting. Results for the year ended December 31, 2016 include an actuarial loss of $26.7 million ($18.3 million after income taxes), as compared to a gain of $30.1 million ($21.4 million after income taxes) from continuing operations for the year ended December 31, 2015.

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We remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint. Additional information regarding our products, markets and financial performance is provided at our web site, www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.

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Results of Operations

The following data and discussion provides an analysis of certain significant factors affecting our results of operations during the periods included in the accompanying consolidated statements of income.

Selected Financial DataYear Ended December 31,Percentage Change
2016201520142016 vs. 20152015 vs. 2014
(In thousands, except percentages and per share amounts)
NET SALES$2,677,203$2,826,429$2,445,548(5)%16%
Cost of goods sold1,706,6271,966,1961,674,700(13)%17%
GROSS PROFIT970,576860,233770,84813%12%
GROSS PROFIT MARGIN36.3%30.4%31.5%
Selling, general and administrative expenses380,464300,440355,13527%(15)%
Research and development expenses80,47589,18788,310(10)%1%
Restructuring and other, net—(6,804)25,947(100)%(126)%
Gain on sales of businesses, net(122,298)——*—%
Acquisition and integration related costs57,384132,29930,158(57)%339%
OPERATING PROFIT574,551345,111271,29866%27%
OPERATING PROFIT MARGIN21.5%12.2%11.1%
Interest and financing expenses(65,181)(81,650)(41,358)(20)%97%
Other income (expenses), net5,89447,283(16,761)(88)%*
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS515,264310,744213,17966%46%
Income tax expense96,26311,13418,484*(40)%
Effective tax rate18.7%3.6%8.7%
INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS419,001299,610194,69540%54%
Equity in net income of unconsolidated investments (net of tax)59,63727,97835,742113%(22)%
NET INCOME FROM CONTINUING OPERATIONS478,638327,588230,43746%42%
Income (loss) from discontinued operations (net of tax)202,13132,476(69,531)**
NET INCOME680,769360,064160,90689%124%
Net income attributable to noncontrolling interests(37,094)(25,158)(27,590)47%(9)%
NET INCOME ATTRIBUTABLE TO ALBEMARLE CORPORATION$643,675$334,906$133,31692%151%
NET INCOME FROM CONTINUING OPERATIONS AS A PERCENTAGE OF NET SALES17.9%11.6%9.4%
Basic earnings (loss) per share:
Continuing operations$3.93$2.72$2.5744%6%
Discontinued operations1.800.29(0.88)**
$5.73$3.01$1.6990%78%
Diluted earnings (loss) per share:
Continuing operations$3.90$2.71$2.5744%5%
Discontinued operations1.780.29(0.88)**
$5.68$3.00$1.6989%78%
  • Percentage calculation is not meaningful.
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Comparison of 2016 to 2015

Net Sales

For the year ended December 31, 2016, we recorded net sales of $2.68 billion, a 5% decrease compared to net sales of $2.83 billion for the corresponding period of 2015. On January 4, 2016, we closed the sale of the metal sulfides business and on February 1, 2016, we closed the sale of the minerals-based flame retardants and specialty chemicals business. The divestiture of these businesses reduced net sales by $265.3 million as compared to corresponding period of 2015. Excluding the impact of the divested businesses noted above, net sales increased by $116.1 million due to $78.8 million of higher volumes as a result of market demand and $37.2 million of favorable price impacts.

Gross Profit

For the year ended December 31, 2016, our gross profit increased $110.3 million, or 13%, from the corresponding 2015 period. Gross profit includes charges of $55.9 million for the year ended December 31, 2015 for the utilization of the inventory markup recorded as part of purchase accounting for the acquisition of Rockwood. The divestiture of our metal sulfides and minerals-based flame retardants businesses in the first quarter of 2016 reduced gross profit by $40.6 million as compared to the year ended December 31, 2015. Excluding the inventory markup charges and the impact of divestitures, gross profit increased by $95.1 million, or 10.4%, due primarily to higher overall sales volumes, favorable pricing impacts, and $24.6 million in lower variable and fixed costs. Overall, these factors contributed to a higher gross profit margin for the year ended December 31, 2016 of 36.3%, up from 30.4% in the corresponding period in 2015. Excluding the inventory markup charges and the impact of divestitures, gross profit margin was 36.7% for the year ended December 31, 2016 as compared to 34.6% in the corresponding period in 2015.

Selling, General and Administrative Expenses

For the year ended December 31, 2016, our selling, general and administrative (“SG&A”) expenses increased $80.0 million, or 27%, compared to the year ended December 31, 2015. SG&A expenses for 2016 included approximately $29.3 million of pension and OPEB costs (including mark-to-market actuarial losses of $26.3 million) allocated to SG&A, as compared to $28.3 million of pension and OPEB benefits (including mark-to-market actuarial gains of $28.1 million) allocated to SG&A in 2015. Excluding the $57.6 million increase in SG&A related to pension and OPEB plans, SG&A increased by $22.4 million, or 6.8%, primarily due to increased compensation costs. As a percentage of net sales, SG&A expenses were 14.2% in 2016, compared to 10.6% in 2015. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, SG&A expenses as a percentage of net sales were 13.2% in 2016 and 11.6% in 2015.

The mark-to-market actuarial loss in 2016 is primarily attributable to a decrease in the weighted-average discount rate to 4.43% from 4.67% for our U.S. pension plans and to 2.00% from 2.76% for our foreign pension plans to reflect market conditions as of the December 31, 2016 measurement date. The mark-to-market actuarial loss in 2016 was partially offset by a a higher return on pension plan assets in 2016 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. and foreign pension plan assets was 8.11% versus an expected return of 6.85%.

The mark-to-market actuarial gain in 2015 is primarily attributable to: (a) an increase in the weighted-average discount rate to 4.67% from 4.19% for our U.S. pension plans and to 2.76% from 2.22% for our foreign pension plans to reflect market conditions as of the December 31, 2015 measurement date, and (b) changes in mortality assumptions. The mark-to-market actuarial gain in 2015 was partially offset by a lower return on pension plan assets in 2015 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. and foreign pension plan assets was (2.58)% versus an expected return of 6.77%.

Research and Development Expenses

For the year ended December 31, 2016, our R&D expenses decreased $8.7 million, or 10%, from the year ended December 31, 2015. As a percentage of net sales, R&D expenses were 3.0% in 2016, compared to 3.2% in 2015.

Restructuring and Other, Net

Included in Restructuring and other, net, for the year ended December 31, 2015 is a gain of $6.8 million ($5.4 million after income taxes) recognized upon the sale of land in Avonmouth, U.K., which was utilized by the phosphorus flame retardants business we exited in 2012.

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Gain on Sales of Businesses, Net

The year ended December 31, 2016 included gains before income taxes of $11.5 million and $112.3 million related to the sales of the metal sulfides business and the minerals-based flame retardants and specialty chemicals business, respectively, both of which closed in the first quarter of 2016. In addition, Gain on sales of businesses, net, for the year ended December 31, 2016 included a loss of $1.5 million on the sale of our wafer reclaim business.

Acquisition and Integration Related Costs

The year ended December 31, 2016 included $52.1 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services, costs to achieve synergies, relocation costs, and other integration costs) and $5.3 million of costs in connection with other significant projects. The year ended December 31, 2015 included $123.9 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services and advisory fees, costs to achieve synergies, relocation costs, and other integration costs)and $8.4 million of costs in connection with other significant projects.

Interest and Financing Expenses

Interest and financing expenses for the year ended December 31, 2016 decreased $16.5 million to $65.2 million from the corresponding 2015 period, due mainly to lower debt levels as well as the favorable impact of the refinancing of the senior notes assumed from Rockwood that was completed on October 15, 2015, partially offset by $1.9 million of accelerated deferred financing costs as a result of the repayment of our term loan in December 2016.

Other Income, Net

Other income, net, for the year ended December 31, 2016 was $5.9 million versus $47.3 million for the corresponding 2015 period. The change was primarily due to $51.8 million of favorable foreign currency transaction gains in 2015. The foreign currency gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency. This was partially offset by a $2.9 million gain in the fair value of our investment in private equity securities recorded during the third quarter of 2016 and $4.4 million in amortization of bridge financing fees and other financing fees related to the acquisition of Rockwood recorded in 2015.

Income Tax Expense

The effective income tax rate for 2016 was 18.7% compared to 3.6% for 2015. Our effective income tax rate differs from the U.S. Federal statutory income tax rates in the comparative periods mainly due to the impact of earnings from outside the U.S. The rate for 2015 also differs as a result of net impacts from the tax on the deemed repatriation of foreign income from legacy Rockwood offset by the reversal of a deferred tax liability established in the opening balance sheet for the portion of legacy Rockwood earnings that were not indefinitely reinvested. Our effective tax rate for 2016 was affected by discrete net tax expense items of $20.2 million related mainly to a tax gain from restructuring the ownership of a foreign subsidiary, foreign tax rate changes, provision to return adjustments and changes in valuation allowances necessary due to the restructuring. Our effective income tax rate in 2015 was affected by discrete net tax benefit items of $41.2 million related mainly to the release of prior year uncertain tax positions associated with lapses in statutes of limitations and audit closures, and items associated with U.S. provision to return adjustments. See Note 20, “Income Taxes” to our consolidated financial statements included in Part II, Item 8 of this report for a reconciliation of the U.S. federal statutory income tax rate to our effective rate for 2016 and 2015.

Equity in Net Income of Unconsolidated Investments

Equity in net income of unconsolidated investments was $59.6 million for the year ended December 31, 2016 compared to $28.0 million in the same period last year. The equity in net income of unconsolidated investments for the year ended December 31, 2015 included a $27.1 million charge for utilization of fair value adjustments to inventories as well as a $2.0 million impairment charge related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Excluding these charges, equity in net income of unconsolidated investments increased by $2.5 million primarily due to higher equity income reported by our Refining Solutions segment joint venture Nippon Ketjen Company Limited primarily due to higher sales volumes and higher equity income reported by our Lithium and Advanced Materials joint venture Windfield Holdings Pty. Ltd. due to higher sales volumes, partially offset by the sale of our ownership interest in Magnifin Magnesiaprodukte GmbH (which was included in the minerals based flame retardants business) in 2016.

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Income from Discontinued Operations

Income from discontinued operations, after income taxes, was $202.1 million for the year ended December 31, 2016 compared to $32.5 million in the same period last year. The year ended December 31, 2016 included a pre-tax gain of $388.0 million ($135.0 million after income taxes) related to the sale of our Chemetall Surface Treatment business, which closed on December 14, 2016. This gain represents the difference between the carrying value of the related assets and their fair value as determined by the sales price less estimated costs to sell, and included the reversal of $81.4 million of foreign currency translation loss out of Accumulated other comprehensive loss. Excluding this gain, the change relates to the discontinuation depreciation and amortization expense in the second half of 2016 due to discontinued operations accounting, favorable sales prices and volumes due to market demands, lower interest expense, as well as a $20.0 million charge of fair value adjustments to inventories in connection with the Rockwood acquisition in 2015.

Net Income Attributable to Noncontrolling Interests

For the year ended December 31, 2016, net income attributable to noncontrolling interests was $37.1 million compared to $25.2 million in the same period last year. This increase of $11.9 million was due primarily to changes in consolidated income related to our Jordanian joint venture from higher sales volumes.

Net Income Attributable to Albemarle Corporation

Net income attributable to Albemarle Corporation increased to $643.7 million for the year ended December 31, 2016, from $334.9 million for the corresponding period of 2015. The year ended December 31, 2016 included net gains of $250.5 million after income taxes related to the sale of businesses, including discontinued operations. The year ended December 31, 2015 included a $67.1 million charge after income taxes for utilization of fair value adjustments to inventories. Excluding these items, net income attributable to Albemarle decreased by $8.8 million. The decrease was primarily due to $51.8 million of favorable foreign currency transaction gains in 2015 related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency and the impact of the operations of the divestitures completed in 2016, partially offset by higher gross profit associated with stronger business results, a reduction in acquisition and integration costs, lower interest associated with lower debt levels and the favorable impact of the refinancing that was completed on October 15, 2015. In addition, our effective tax rate increased in 2016 due to discrete net tax expense items of $20.2 million related mainly to a tax gain from restructuring the ownership of a foreign subsidiary, foreign tax rate changes, provision to return adjustments and changes in valuation allowances necessary due to the restructuring, as compared to discrete net tax benefit items in 2015 of $41.2 million related mainly to the release of prior year uncertain tax positions associated with lapses in statutes of limitations and audit closures, and items associated with U.S. provision to return adjustments.

Other Comprehensive Income (Loss), Net of Tax

Total other comprehensive income (loss), after income taxes, was $8.3 million in 2016 compared to ($360.8) million in 2015. The majority of these amounts are the result of translating our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In 2016, other comprehensive loss from foreign currency translation adjustments was $20.8 million, mainly as a result of unfavorable movements in the British Pound Sterling of approximately $25 million, the Chinese Renminbi of approximately $12 million, the Korean Won of approximately $6 million, the Turkish Lira of approximately $6 million, partially offset by favorable movements in the European Union Euro of approximately $15 million and the Brazilian Real of approximately $13 million. Included in the currency movements for 2016 is the favorable effect of $81.4 million in accumulated foreign currency translation losses that were reversed as a result of the sale of the Chemetall Surface Treatment business. Also included in total other comprehensive income for 2016 is income of $26.1 million in connection with the revaluation of our €700.0 million senior notes which were designated as a hedge of our net investment in foreign operations. In 2015, other comprehensive loss from foreign currency translation adjustments was $413.0 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $279 million, the British Pound Sterling of approximately $49 million, the Brazilian Real of approximately $30 million, the Turkish Lira of approximately $10 million, the Korean Won of approximately $7 million, the Chinese Renminbi of approximately $8 million, the South African Rand of approximately $8 million and a net unfavorable variance in various other currencies totaling approximately $23 million (each approximately $5 million or less). Also included in total other comprehensive loss for 2015 is income of $50.9 million in connection with the revaluation of our €700.0 million senior notes and settlement of related foreign currency forward contracts, both of which were designated as a hedge of our net investment in foreign operations.

Segment Information Overview. 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

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operating decision maker to evaluate performance and make resource allocation decisions. Our reportable business segments consist of: (1) Lithium and Advanced Materials, (2) Bromine Specialties and (3) Refining Solutions.

Summarized financial information concerning our reportable segments is shown in the following tables. Results for 2015 have been recast to reflect the change in segments previously noted. The “All Other” category comprises three operating segments that do not fit into any of our core businesses subsequent to the acquisition of Rockwood: minerals-based flame retardants and specialty chemicals, fine chemistry services and metal sulfides. During 2016, we completed the sales of the metal sulfides business and the minerals-based flame retardants and specialty chemicals business.

The Corporate category is not considered to be a segment and includes corporate-related items not allocated to the reportable segments. Pension and OPEB service cost (which represents the benefits earned by active employees during the period) and amortization of prior service cost or benefit are allocated to the segments, All Other, and Corporate, whereas the remaining components of pension and OPEB benefits cost or credit (“Non-operating pension and OPEB items”) are included in Corporate. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs.

The Company’s chief operating decision maker uses earnings before interest, taxes, depreciation and amortization, as adjusted on a consistent basis for certain non-recurring or unusual items such as acquisition and integration related costs, utilization of inventory markup, gains or losses on sales of businesses, restructuring charges, facility divestiture charges, non-operating pension and OPEB items and other significant non-recurring items (“adjusted EBITDA”), in a balanced manner and on a segment basis to assess the ongoing performance of the Company’s business segments and to allocate resources. 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. 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 income (loss) 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.

Year Ended December 31,Percentage Change
2016%2015%2016 vs. 2015
(In thousands, except percentages)
Net sales:
Lithium and Advanced Materials$968,21636.2%$834,59029.5%16%
Bromine Specialties792,42529.6%775,72927.4%2%
Refining Solutions732,13727.3%729,26125.8%—%
All Other180,9886.8%471,43416.7%(62)%
Corporate3,4370.1%15,4150.6%(78)%
Total net sales$2,677,203100.0%$2,826,429100.0%(5)%
Adjusted EBITDA:
Lithium and Advanced Materials$363,36048.0%$312,86741.4%16%
Bromine Specialties226,92629.9%222,65329.5%2%
Refining Solutions238,96331.5%197,59526.1%21%
All Other14,7721.9%53,9937.1%(73)%
Corporate(85,804)(11.3)%(31,108)(4.1)%176%
Total adjusted EBITDA$758,217100.0%$756,000100.0%—%
Albemarle Corporation and Subsidiaries

See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, from Net income (loss) attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, (in thousands):

Lithium and Advanced MaterialsBromine SpecialtiesRefining SolutionsReportable Segments TotalAll OtherCorporateConsolidated Total
2016
Net income (loss) attributable to Albemarle Corporation$261,394$187,364$202,874$651,632$131,301$(139,258)$643,675
Depreciation and amortization101,96639,56236,089177,6177,3026,056190,975
(Gain) loss on sales of businesses, net(a)————(123,831)1,533(122,298)
Acquisition and integration related costs(b)—————57,38457,384
Interest and financing expenses—————65,18165,181
Income tax expense—————96,26396,263
Income from discontinued operations (net of tax)—————(202,131)(202,131)
Non-operating pension and OPEB items—————25,58925,589
Other(c)—————3,5793,579
Adjusted EBITDA$363,360$226,926$238,963$829,249$14,772$(85,804)$758,217
2015
Net income (loss) attributable to Albemarle Corporation$148,821$186,474$161,585$496,880$32,781$(194,755)$334,906
Depreciation and amortization84,06936,17934,039154,28718,1838,703181,173
Utilization of inventory markup(d)79,977——79,9773,029—83,006
Restructuring and other, net(e)—————(6,804)(6,804)
Acquisition and integration related costs(b)—————132,299132,299
Interest and financing expenses—————81,65081,650
Income tax expense—————11,13411,134
Income from discontinued operations (net of tax)—————(32,476)(32,476)
Non-operating pension and OPEB items—————(35,300)(35,300)
Other(f)——1,9711,971—4,4416,412
Adjusted EBITDA$312,867$222,653$197,595$733,115$53,993$(31,108)$756,000
(a)See “Gain on Sales of Businesses, Net” on page 34 for a description of these costs.
(b)See “Acquisition and Integration Related Costs” on page 34 for a description of these costs.
(c)Includes amounts recorded in (1) Research and development expenses related to the write-off of fixed assets of $1.4 million and (2) Selling, general and administrative expenses related to the net loss on the sales of properties of $0.9 million and (3) Other income (expenses), net related to environmental charges related to a site formerly owned by Albemarle of $2.4 million, partially offset by a gain related to a previously disposed of site in China of $1.1 million.
(d)In connection with the acquisition of Rockwood, the Company valued Rockwood’s existing inventory at fair value as of the Acquisition Closing Date, which resulted in a markup of the underlying net book value of the inventory totaling approximately $103.4 million. The inventory markup was expensed over the estimated remaining selling period. For the year ended December 31, 2015, $55.9 million was included in Cost of goods sold, and Equity in net income of unconsolidated investments was reduced by $27.1 million, related to the utilization of the inventory markup.
(e)See “Restructuring and Other, Net” on page 33 for a description of this gain.
(f)Refining Solutions includes an impairment charge of approximately $2.0 million related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Corporate includes approximately $4.4 million of financing-related fees expensed in connection with the acquisition of Rockwood.

Lithium and Advanced Materials

Lithium and Advanced Materials segment net sales for the year ended December 31, 2016 were $968.2 million, up $133.6 million, or 16%, in comparison to the same period in 2015. The increase was primarily driven by $78.0 million of favorable

Albemarle Corporation and Subsidiaries

Lithium sales volumes due to market demand, $70.6 million of favorable Lithium price impacts due primarily to price increases in our battery-grade lithium carbonate and hydroxide applications, and $0.7 million of favorable currency translation impacts, partially offset by $26.9 million of unfavorable PCS volume and price impacts due primarily to weakness in the curatives market and the bankruptcy filing of one of our customers. Adjusted EBITDA for Lithium and Advanced Materials increased 16%, or $50.5 million, to $363.4 million for the year ended December 31, 2016, compared to the same period in 2015 primarily due to higher overall sales volumes, favorable price impacts and $4.4 million of favorable currency translation impacts.

Bromine Specialties

Bromine Specialties segment net sales for the year ended December 31, 2016 were $792.4 million, up $16.7 million, or 2%, in comparison to the same period in 2015. The increase was driven mainly by $22.9 million of favorable volumes due to our ability to supply globally in a tighter market environment for certain products and $2.5 million of favorable currency translation impacts, partially offset by $8.7 million of unfavorable price impacts. Adjusted EBITDA for Bromine Specialties increased 2%, or $4.3 million, to $226.9 million for the year ended December 31, 2016, compared to the same period in 2015, primarily due to $15.9 million of lower fixed and variable costs, and $2.4 million of favorable currency translation impacts, partially offset by a $12.4 million increase in net income attributable to noncontrolling interests due to higher sales volumes from our Jordanian joint venture and unfavorable price impacts.

Refining Solutions

Refining Solutions segment net sales for the year ended December 31, 2016 were $732.1 million, an increase of $2.9 million, or 0.4%, compared to the year ended December 31, 2015. This increase was primarily due to $14.9 million of higher Clean Fuels Technology volumes due to demand, partially offset by $9.7 million of lower Heavy Oil Upgrading volumes due to demand and $3.2 million of unfavorable currency translation impacts. Refining Solutions adjusted EBITDA increased 21%, or $41.4 million, to $239.0 million for the year ended December 31, 2016 in comparison to the corresponding period of 2015, primarily driven by higher overall sales volumes, $13.2 million of lower variable and fixed costs and $8.8 million in increased equity in net income from unconsolidated investments from our joint venture Nippon Ketjen Company Limited primarily due to higher sales volumes.

All Other

On January 4, 2016, we closed the sale of the metal sulfides business, and on February 1, 2016, we closed the sale of the minerals-based flame retardants and specialty chemicals business. The divestiture of these businesses reduced net sales and adjusted EBITDA for year ended December 31, 2016 as compared to the prior year period by $265.3 million and $34.2 million, respectively.

All Other net sales for the year ended December 31, 2016 were $181.0 million, a decrease of $290.4 million compared to the year ended December 31, 2015. Excluding the impact of the divested businesses noted above, All Other net sales decreased by $25.1 million due to $13.8 million of unfavorable price impacts and $11.3 million of lower sales volume due to market demand in the fine chemistry services business. All Other adjusted EBITDA was down 73%, or $39.2 million, for the year ended December 31, 2016 in comparison to the same period of 2015. Excluding the impact of divested businesses noted above, All Other adjusted EBITDA decreased by $5.0 million due to lower overall sales in fine chemistry services, partially offset by $14.2 million of lower fixed and variable costs.

Corporate

Corporate adjusted EBITDA was a charge of $85.8 million for the year ended December 31, 2016, an increase of $54.7 million, compared to the year ended December 31, 2015, primarily due to a reduction in foreign currency gains of $49.5 million. The foreign transaction gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency

Comparison of 2015 to 2014

Net Sales

For the year ended December 31, 2015, we recorded net sales of $2.83 billion, a 16% increase compared to net sales of $2.45 billion for the corresponding period of 2014. Approximately $591.0 million of the increase was attributable to the impact of the Rockwood acquisition. Excluding the acquisition of Rockwood, net sales decreased by $210.1 million primarily due to $106.5 million of unfavorable sales volumes, $87.7 million of unfavorable impacts from currency translation and $15.8 million of unfavorable price impacts due to market conditions and portfolio mix. The unfavorable sales volumes were due to lower Clean Fuels Technologies, Fine Chemistry Services, and Bromine volumes partially offset by increased Heavy Oil Upgrading

Albemarle Corporation and Subsidiaries

and PCS sales volumes. The unfavorable price impacts were primarily due to lower Refining Solutions, Fine Chemistry Services, and PCS prices partly offset by favorable price impacts for Bromine.

Gross Profit

For the year ended December 31, 2015, our gross profit increased $89.4 million, or 12%, from the corresponding 2014 period. Gross profit for 2015 included $1.7 million of pension and OPEB benefits (including mark-to-market actuarial gains of $2.0 million) allocated to cost of good sold, as compared to $36.5 million of pension and OPEB costs (including mark-to-market actuarial losses of $36.4 million) allocated to cost of goods sold in 2014. Excluding the $38.2 million increase in gross profit related to pension and OPEB plans, gross profit increased by $51.2 million due to $133.9 million of gross profit attributable to the performance of the acquired Rockwood business, which included a $55.9 million charge for the utilization of the inventory markup recorded as part of purchase accounting for the acquisition, partially offset by an $82.7 million decrease in gross profit due primarily to unfavorable impacts from currency translation, unfavorable price impacts due to market conditions and portfolio mix and lower overall sales volumes. Overall, these factors contributed to a lower gross profit margin for the year ended December 31, 2015 of 30.4%, down from 31.5% in the corresponding period of 2014. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, our gross profit margin was 30.4% in 2015 and 33.0% in 2014.

The mark-to-market actuarial loss in 2014 was primarily attributable to: (a) a decrease in the weighted-average discount rate for our pension plans to 4.12% from 5.00% to reflect market conditions as of the December 31, 2014 measurement date, and (b) changes in mortality assumptions, and to a lesser extent, other demographic assumptions related to our pension plans. The mark-to-market actuarial loss in 2014 was partially offset by a higher return on pension plan assets in 2014 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. pension plan assets was 8.87% versus an expected return of 6.91%.

Selling, General and Administrative Expenses

For the year ended December 31, 2015, our SG&A expenses decreased $54.7 million, or 15%, compared to the year ended December 31, 2014. SG&A expenses for 2015 included approximately $28.3 million of pension and OPEB benefits (including mark-to-market actuarial gains of $28.1 million) allocated to SG&A, as compared to $97.1 million of pension and OPEB costs (including mark-to-market actuarial losses of $94.5 million) allocated to SG&A in 2014. Excluding the $125.4 million decrease in SG&A related to pension and OPEB plans, SG&A increased by $70.7 million, or 27.4%, due to the acquisition of Rockwood, net of realized synergies. As a percentage of net sales, SG&A expenses were 10.6% in 2015, compared to 14.5% in 2014. Excluding the impact of pension and OPEB mark-to-market actuarial losses and gains, SG&A expenses as a percentage of net sales were 11.6% in 2015 and 10.7% in 2014.

The mark-to-market actuarial gain in 2015 was primarily attributable to: (a) an increase in the weighted-average discount rate to 4.67% from 4.19% for our U.S. pension plans and to 2.76% from 2.22% for our foreign pension plans to reflect market conditions as of the December 31, 2015 measurement date, and (b) changes in mortality assumptions. The mark-to-market actuarial gain in 2015 was partially offset by a lower return on pension plan assets in 2015 than was expected, as a result of overall market and investment portfolio performance. The weighted-average actual return on our U.S. and foreign pension plan assets was (2.58)% versus an expected return of 6.77%. The mark-to-market actuarial loss in 2014 resulted from the factors as discussed in Gross Profit above.

Research and Development Expenses

For the year ended December 31, 2015, our R&D expenses increased $0.9 million, or 1%, from the year ended December 31, 2014, primarily due to the acquisition of Rockwood. As a percentage of net sales, R&D expenses were 3.2% in 2015, compared to 3.6% in 2014.

Restructuring and Other, Net

Included in Restructuring and other, net, for the year ended December 31, 2015 is a gain of $6.8 million ($5.4 million after income taxes) recognized upon the sale of land in Avonmouth, U.K., which was utilized by the phosphorus flame retardants business we exited in 2012. Restructuring and other, net, of $25.9 million for the year ended December 31, 2014 included the following items:

(a)Estimated costs of approximately $20.5 million ($13.6 million after income taxes) in connection with action we initiated to reduce the high cost supply capacity of certain aluminum alkyl products, primarily through the termination of a third party manufacturing contract.
Albemarle Corporation and Subsidiaries
(b)An impairment charge of $3.0 million ($1.9 million after income taxes) for certain capital project costs also related to aluminum alkyls capacity which we do not expect to recover.
(c)Other net charges of $2.4 million ($1.4 million after income taxes), mainly in connection with a write-off of certain multi-product facility project costs that we do not expect to recover in future periods.

Acquisition and Integration Related Costs

The year ended December 31, 2015 included $123.9 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services and advisory fees, costs to achieve synergies, relocation costs, and other integration costs) and $8.4 million of costs in connection with other significant projects. The year ended December 31, 2014 included $23.6 million of acquisition and integration related costs directly related to the acquisition of Rockwood and $6.6 million of costs in connection with other significant projects.

Interest and Financing Expenses

Interest and financing expenses for the year ended December 31, 2015 increased $40.3 million to $81.7 million from the corresponding 2014 period, due mainly to higher borrowing levels in connection with the acquisition of Rockwood. Included in 2015 is a charge of approximately $5.4 million related to the early extinguishment of the 4.625% senior notes we assumed from Rockwood.

Other Income (Expenses), Net

Other income (expenses), net, for the year ended December 31, 2015 was $47.3 million versus ($16.8) million for the corresponding 2014 period. The change was due mainly to $54.7 million of favorable foreign currency transaction gains and a $12.3 million reduction in amortization of bridge facility fees and other financing fees related to the acquisition of Rockwood. The foreign currency gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency.

Income Tax Expense

The effective income tax rate for 2015 was 3.6% compared to 8.7% for 2014. Our effective income tax rate differs from the U.S. federal statutory income tax rates in the comparative periods mainly due to the impact of earnings from outside the U.S., including net impacts on the release of the liability from earnings that were not indefinitely reinvested and were repatriated from legacy Rockwood. Our effective tax rate for 2015 was affected by discrete net tax benefit items of $41.2 million related mainly to the release of prior year uncertain tax positions associated with lapses in statutes of limitations and audit closures, and items associated with U.S. provision to return adjustments. Our effective income tax rate in 2014 was affected by tax benefits of $74.2 million related to restructuring charges, a pension plan actuarial loss and the release of reserves related principally to the expiration of the U.S. federal statute of limitations. See Note 20, “Income Taxes” to our consolidated financial statements included in Part II, Item 8 of this report for a reconciliation of the U.S. federal statutory income tax rate to our effective rate for 2015 and 2014.

Equity in Net Income of Unconsolidated Investments

Equity in net income of unconsolidated investments was $28.0 million for the year ended December 31, 2015 compared to $35.7 million in the same period last year. The current year equity in net income of unconsolidated investments included a $27.1 million charge for utilization of fair value adjustments to inventories as well as a $2.0 million impairment charge related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Excluding theses charges, equity in net income of unconsolidated investments increased by $21.4 million primarily due to equity income derived from unconsolidated investments we acquired from Rockwood, reported in the Lithium and Advanced Materials segment, partially offset by lower equity income reported by our Refining Solutions segment joint venture Nippon Ketjen Company Limited primarily due to lower sales volumes.

Income (Loss) from Discontinued Operations

Income from discontinued operations, after income taxes, of $32.5 million for the year ended December 31, 2015 included the operations of the Chemetall Surface Treatment business, which was sold on December 14, 2016, as well as the allocation of interest expense not directly attributable to other operations based on the ratio of net assets held for sale to the sum of total net assets plus consolidated debt. Loss from discontinued operations, after income taxes, of $69.5 million for the year ended December 31, 2014 included a pre-tax charge of $85.5 million ($65.7 million after income taxes) related to the sale of our antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc., which closed on September 1, 2014. This

Albemarle Corporation and Subsidiaries

charge represented the difference between the carrying value of the related assets and their fair value as determined by the sales price less estimated costs to sell, and was primarily attributable to the write-off of goodwill, intangibles and long-lived assets, net of cumulative foreign currency translation gains of $17.8 million.

Net Income Attributable to Noncontrolling Interests

For the year ended December 31, 2015, net income attributable to noncontrolling interests was $25.2 million compared to $27.6 million in the same period last year. This decrease of $2.4 million was due primarily to changes in consolidated income related to our Jordanian joint venture.

Net Income Attributable to Albemarle Corporation

Net income attributable to Albemarle Corporation increased to $334.9 million for the year ended December 31, 2015, from $133.3 million for the corresponding period of 2014. The total estimated impact of the Rockwood acquisition is income of approximately $3.8 million before income taxes, including earnings of the acquiree (including discontinued operations, as included in Note 2, “Acquisitions” to our consolidated financial statements included in Part II, Item 8 of this report), acquisition and integration related costs, interest expense associated with additional borrowings, and other currency transaction gains related to the execution of the closing. Excluding the impact of the Rockwood acquisition, net income increased approximately $197.8 million primarily due to a $144.4 million decrease in pension and OPEB charges versus the prior year, the loss from discontinued operations and restructuring and other charges in the prior year of $69.5 million and $25.9 million, respectively, plus the gain on sale of land of $6.8 million in restructuring and other for the 2015 period, partly offset by unfavorable impacts in operating profit of approximately $48.8 million, including the unfavorable impacts of currency translation.

Other Comprehensive Loss, Net of Tax

Total other comprehensive loss, after income taxes, was $360.8 million in 2015 compared to $178.7 million in 2014. The majority of these amounts are the result of translating our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In 2015, other comprehensive loss from foreign currency translation adjustments was $413.0 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $279 million, the British Pound Sterling of approximately $49 million, the Brazilian Real of approximately $30 million, the Turkish Lira of approximately $10 million, the Korean Won of approximately $7 million, the Chinese Renminbi of approximately $8 million, the South African Rand of approximately $8 million and a net unfavorable variance in various other currencies totaling approximately $23 million (each approximately $5 million or less). Also included in total other comprehensive loss for 2015 is income of $50.9 million in connection with the revaluation of our €700.0 million senior notes which were designated as a hedge of our net investment in foreign operations. In 2014, other comprehensive loss from foreign currency translation adjustments was $168.7 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $124 million, the Chinese Renminbi of approximately $18 million and the Brazilian Real of approximately $13 million. Also included in total other comprehensive loss for 2014 is a realized loss of $21.0 million related to an interest rate swap which settled in the fourth quarter of 2014, and income of $11.4 million in connection with the revaluation of our €700.0 million senior notes and settlement of related foreign currency forward contracts, both of which were designated as a hedge of our net investment in foreign operations.

Albemarle Corporation and Subsidiaries

Segment Information Overview. Summarized financial information concerning our reportable segments is shown in the following tables. Results for 2015 and 2014 have been recast to reflect the change in segments previously noted.

Year Ended December 31,Percentage Change
2015%2014%2015 vs. 2014
(In thousands, except percentages)
Net sales:
Lithium and Advanced Materials$834,59029.5%$312,78812.8%167%
Bromine Specialties775,72927.4%808,85733.1%(4)%
Refining Solutions729,26125.8%852,13934.8%(14)%
All Other471,43416.7%471,76419.3%—%
Corporate15,4150.6%——%*
Total net sales$2,826,429100.0%$2,445,548100.0%16%
Adjusted EBITDA:
Lithium and Advanced Materials$312,86741.4%$81,59614.5%283%
Bromine Specialties222,65329.5%224,97640.0%(1)%
Refining Solutions197,59526.1%256,48545.6%(23)%
All Other53,9937.1%73,97313.2%(27)%
Corporate(31,108)(4.1)%(74,875)(13.3)%(58)%
Total adjusted EBITDA$756,000100.0%$562,155100.0%34%
  • Percentage calculation is not meaningful.
Albemarle Corporation and Subsidiaries

See below for a reconciliation of adjusted EBITDA, the non-GAAP financial measure, from Net income (loss) attributable to Albemarle Corporation, the most directly comparable financial measure calculated and reported in accordance with GAAP, (in thousands):

Lithium and Advanced MaterialsBromine SpecialtiesRefining SolutionsReportable Segments TotalAll OtherCorporateConsolidated Total
2015
Net income (loss) attributable to Albemarle Corporation$148,821$186,474$161,585$496,880$32,781$(194,755)$334,906
Depreciation and amortization84,06936,17934,039154,28718,1838,703181,173
Utilization of inventory markup(a)79,977——79,9773,029—83,006
Restructuring and other, net(b)—————(6,804)(6,804)
Acquisition and integration related costs(c)—————132,299132,299
Interest and financing expenses—————81,65081,650
Income tax expense—————11,13411,134
Income from discontinued operations (net of tax)—————(32,476)(32,476)
Non-operating pension and OPEB items—————(35,300)(35,300)
Other(d)——1,9711,971—4,4416,412
Adjusted EBITDA$312,867$222,653$197,595$733,115$53,993$(31,108)$756,000
2014
Net income (loss) attributable to Albemarle Corporation$65,806$189,059$223,815$478,680$60,495$(405,859)$133,316
Depreciation and amortization15,79035,91732,67084,37713,4782,552100,407
Restructuring and other, net(b)—————25,94725,947
Acquisition and integration related costs(c)—————30,15830,158
Interest and financing expenses—————41,35841,358
Income tax expense—————18,48418,484
Loss from discontinued operations (net of tax)—————69,53169,531
Non-operating pension and OPEB items—————125,462125,462
Other(e)—————17,49217,492
Adjusted EBITDA$81,596$224,976$256,485$563,057$73,973$(74,875)$562,155
(a)In connection with the acquisition of Rockwood, the Company valued Rockwood’s existing inventory at fair value as of the Acquisition Closing Date, which resulted in a markup of the underlying net book value of the inventory totaling approximately $103.4 million. The inventory markup was expensed over the estimated remaining selling period. For the year ended December 31, 2015, $55.9 million was included in Cost of goods sold, and Equity in net income of unconsolidated investments was reduced by $27.1 million, related to the utilization of the inventory markup.
(b)See “Restructuring and Other, Net” on page 39 for a description of this gain.
(c)See “Acquisition and Integration Related Costs” on page 40 for a description of these costs.
(d)Refining Solutions includes an impairment charge of approximately $2.0 million related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Corporate includes approximately $4.4 million of financing-related fees expensed in connection with the acquisition of Rockwood.
(e)Financing-related fees expense in connection with the acquisition of Rockwood.

Lithium and Advanced Materials

Lithium and Advanced Materials segment net sales for the year ended December 31, 2015 were $834.6 million, up $521.8 million, or 167%, in comparison to the same period in 2014. The increase was driven mainly by the acquisition of Rockwood and $26.0 million of favorable PCS volumes due to higher demand, partially offset by $7.4 million of unfavorable impacts from currency translation, primarily due to the weaker European Union Euro. Adjusted EBITDA for Lithium and Advanced Materials was up 283%, or $231.3 million, to $312.9 million for the year ended December 31, 2015, compared to the same period in 2014, with approximately $213.5 million due to the acquisition of Rockwood and $24.6 million in higher PCS sales

Albemarle Corporation and Subsidiaries

volumes due to strong demand, partially offset by $3.6 million of unfavorable impacts of currency translation, primarily due to the weaker European Union Euro.

Bromine Specialties

Bromine Specialties segment net sales for the year ended December 31, 2015 were $775.7 million, a decrease of $33.1 million, or 4%, in comparison to the same period in 2014. The decrease was driven mainly by $21.8 million of unfavorable volumes on weaker demand and $20.5 million of unfavorable impacts from currency translation, primarily due to the weaker European Union Euro, partially offset by $9.4 million of favorable price impacts on certain products. Adjusted EBITDA for Bromine Specialties decreased 1%, or $2.3 million, to $222.7 million for the year ended December 31, 2015, compared to the same period in 2014, with approximately $12.5 million of unfavorable impacts of currency translation, primarily due to the weaker European Union Euro, partially offset by $9.4 million in favorable pricing impacts due to market conditions.

Refining Solutions

Refining Solutions segment net sales for the year ended December 31, 2015 were $729.3 million, a decrease of $122.9 million, or 14%, compared to the year ended December 31, 2014. This decrease was predominantly due to $103.5 million of unfavorable Clean Fuels Technology volumes due to customer demand, $15.0 million unfavorable Clean Fuels Technology and Heavy Oil Upgrading pricing impacts due to product and customer mix, and $30.4 million of unfavorable impacts from currency translation, primarily due to the weaker European Union Euro, partially offset by $30.4 million of higher Heavy Oil Upgrading volumes. Refining Solutions adjusted EBITDA decreased 23%, or $58.9 million, to $197.6 million for the year ended December 31, 2015 in comparison to the corresponding period of 2014. This decrease was due primarily to lower overall sales volumes primarily in Clean Fuels Technology due to lower demand, unfavorable pricing and mix due to economic conditions and specific crude feeds, and unfavorable impacts of currency translation, primarily due to the weaker European Union Euro, partially offset by $21.7 million in favorable pricing on raw materials and natural gas.

All Other

All Other net sales for the year ended December 31, 2015 were $471.4 million, a decrease of $0.3 million compared to the year ended December 31, 2014. The decrease was driven mainly by $55.3 million of unfavorable Fine Chemistry Services volumes, and $29.4 million of unfavorable impacts from currency translation impacts, primarily due to the weaker European Union Euro, offset by the acquisition of Rockwood. All Other adjusted EBITDA was down 27%, or $20.0 million, for the year ended December 31, 2015 in comparison to the same period of 2014. This decrease was due primarily to lower overall sales and unfavorable impacts from currency translation, primarily due to the weaker European Union Euro, partially offset by the acquisition of Rockwood.

Corporate

Corporate adjusted EBITDA was a charge of $31.1 million for the year ended December 31, 2015, a decrease of $43.8 million, compared to the year ended December 31, 2014. The change was due mainly to $52.7 million of foreign currency translation gains and achieved synergies partially offset by the acquisition of Rockwood. The foreign translation gains are primarily related to cash denominated in U.S. Dollars held by foreign subsidiaries where the European Union Euro serves as the functional currency.

Summary of Critical Accounting Policies and Estimates

Estimates, Assumptions and Reclassifications

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Listed below are the estimates and assumptions that we consider to be critical in the preparation of our financial statements.

Certain amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to the current presentation.

Property, Plant and Equipment. We assign the useful lives of our property, plant and equipment based upon our internal engineering estimates which are reviewed periodically. The estimated useful lives of our property, plant and equipment range from two to sixty years and depreciation is recorded on the straight-line method, with the exception of our long-term mineral rights, which are depleted on a units-of-production method. We evaluate the recovery of our property, plant and equipment by comparing the net carrying value of the asset group to the undiscounted net cash flows expected to be generated from the use

Albemarle Corporation and Subsidiaries

and eventual disposition of that asset group when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the carrying amount of the asset group is not recoverable, the fair value of the asset group is measured and if the carrying amount exceeds the fair value, an impairment loss is recognized.

Acquisition Method of Accounting. We recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition for acquired businesses. Determining the fair value of these items requires management’s judgment, the utilization of independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, customer attrition rates, royalty rates, market prices and tax rates, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. For more information on our acquisitions and application of the acquisition method, see Note 2, “Acquisitions” to our consolidated financial statements included in Part II, Item 8 of this report.

Income Taxes. We assume the deductibility of certain costs in our income tax filings, and we estimate the future recovery of deferred tax assets, uncertain tax positions and indefinite investment assertions.

Environmental Remediation Liabilities. We estimate and accrue the costs required to remediate a specific site depending on site-specific facts and circumstances. Cost estimates to remediate each specific site are developed by assessing (i) the scope of our contribution to the environmental matter, (ii) the scope of the anticipated remediation and monitoring plan and (iii) the extent of other parties’ share of responsibility.

Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Revenue Recognition

We recognize sales when the revenue is realized or realizable, and has been earned, in accordance with authoritative accounting guidance. We recognize net sales as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. Significant portions of our sales are sold free on board shipping point or on an equivalent basis, and other transactions are based upon specific contractual arrangements. Our standard terms of delivery are generally included in our contracts of sale, order confirmation documents and invoices. We recognize revenue from services when performance of the services has been completed. Where the Company incurs pre-production design and development costs under long-term supply contracts, these costs are expensed where they relate to the products sold unless contractual guarantees for reimbursement exist. Conversely, these costs are capitalized if they pertain to equipment that we will own and use in producing the products to be supplied and expect to utilize for future revenue generating activities.

Goodwill and Other Intangible Assets

We account for goodwill and other intangibles acquired in a business combination in conformity with current accounting guidance which requires goodwill and indefinite-lived intangible assets to not be amortized.

We test goodwill for impairment by comparing the estimated fair value of our reporting units to the related carrying value. We estimate the fair value based on present value techniques involving future cash flows. Future cash flows include assumptions about sales volumes, selling prices, raw material prices, labor and other employee benefit costs, capital additions, income taxes, working capital, and other economic or market-related factors. Significant management judgment is involved in estimating these variables and they include inherent uncertainties since they are forecasting future events. We perform a sensitivity analysis by using a range of inputs to confirm the reasonableness of these estimates being used in the goodwill impairment analysis. We use a Weighted Average Cost of Capital (“WACC”) approach to determine our discount rate for goodwill recoverability testing. Our WACC calculation incorporates industry-weighted average returns on debt and equity from a market perspective. The factors in this calculation are largely external to the Company and, therefore, are beyond our control. We test our recorded goodwill for impairment in the fourth quarter of each year or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts. The Company performed its annual goodwill impairment test as of October 31, 2016 and concluded there was no impairment as of that date. In addition, no indications of impairment in any of our reporting units were indicated by the sensitivity analysis.

We assess our indefinite-lived intangible assets, which include trade names, for impairment annually and between annual tests if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The indefinite-lived intangible asset impairment standard allows us to first assess qualitative factors to determine if a quantitative impairment test is

Albemarle Corporation and Subsidiaries

necessary. Further testing is only required if we determine, based on the qualitative assessment, that it is more likely than not that the indefinite-lived intangible asset’s fair value is less than its carrying amount. If we determine based on the qualitative assessment that it is more likely than not that the asset is impaired, an impairment test is performed by comparing the fair value of the indefinite-lived intangible asset to its carrying amount.

Definite-lived intangible assets, such as purchased technology, patents, customer lists and trade names, are amortized over their estimated useful lives generally for periods ranging from five to twenty-five years. Except for customer lists and relationships associated with our Lithium business, which are amortized using the pattern of economic benefit method, definite-lived intangible assets are amortized using the straight-line method. We evaluate the recovery of our definite-lived intangible assets by comparing the net carrying value of the asset group to the undiscounted net cash flows expected to be generated from the use and eventual disposition of that asset group when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the carrying amount of the asset group is not recoverable, the fair value of the asset group is measured and if the carrying amount exceeds the fair value, an impairment loss is recognized. See Note 12, “Goodwill and Other Intangibles” to our consolidated financial statements included in Part II, Item 8 of this report.

Pension Plans and Other Postretirement Benefits

Under authoritative accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. As required, we recognize a balance sheet asset or liability for each of our pension and OPEB plans equal to the plan’s funded status as of the measurement date. The primary assumptions are as follows:

•Discount Rate—The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future.
•Expected Return on Plan Assets—We project the future return on plan assets based on prior performance and future expectations for the types of investments held by the plans as well as the expected long-term allocation of plan assets for these investments. These projected returns reduce the net benefit costs recorded currently.
•Rate of Compensation Increase—For salary-related plans, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement.
•Mortality Assumptions—Assumptions about life expectancy of plan participants are used in the measurement of related plan obligations.

Actuarial gains and losses are recognized annually in our consolidated statements of income in the fourth quarter and whenever a plan is determined to qualify for a remeasurement during a fiscal year. The remaining components of pension and OPEB plan expense, primarily service cost, interest cost and expected return on assets, are recorded on a monthly basis. The market-related value of assets equals the actual market value as of the date of measurement.

During 2016, we made changes to assumptions related to discount rates and expected rates of return on plan assets. We consider available information that we deem relevant when selecting each of these assumptions.

Our U.S. defined benefit plans for non-represented employees are closed to new participants, with no additional benefits accruing under these plans as participants’ accrued benefits have been frozen. In selecting the discount rates for the U.S. plans, we consider expected benefit payments on a plan-by-plan basis. As a result, the Company uses different discount rates for each plan depending on the demographics of participants and the expected timing of benefit payments. For 2016, the discount rates were calculated using the results from a bond matching technique developed by Milliman, which matched the future estimated annual benefit payments of each respective plan against a portfolio of bonds of high quality to determine the discount rate. We believe our selected discount rates are determined using preferred methodology under authoritative accounting guidance and accurately reflect market conditions as of the December 31, 2016 measurement date.

In selecting the discount rates for the foreign plans, we look at long-term yields on AA-rated corporate bonds when available. Our actuaries have developed yield curves based on the yields of constituent bonds in the various indices as well as on other market indicators such as swap rates, particularly at the longer durations. For the Eurozone, we apply the Aon Hewitt yield curve to projected cash flows from the relevant plans to derive the discount rate. For the U.K., the discount rate is determined by applying the Aon Hewitt yield curve for typical schemes of similar duration to projected cash flows of Albemarle’s U.K. plan. In other countries where there is not a sufficiently deep market of high-quality corporate bonds, we set the discount rate by referencing the yield on government bonds of an appropriate duration.

At December 31, 2016, the weighted-average discount rate for the U.S. and foreign pension plans was decreased to 4.43% and 2.00%, respectively, from 4.67% and 2.76%, respectively, at December 31, 2015 to reflect market conditions as of

Albemarle Corporation and Subsidiaries

the December 31, 2016 measurement date. The discount rate for the OPEB plans at December 31, 2016 and 2015 was 4.35% and 4.59%, respectively.

In estimating the expected return on plan assets, we consider past performance and future expectations for the types of investments held by the plan as well as the expected long-term allocations of plan assets to these investments. For the years 2016 and 2015, the weighted-average expected rate of return on U.S. pension plan assets was 6.89% and 6.88%, respectively, and the weighted-average expected rate of return on foreign pension plan assets was 6.66% and 5.76%, respectively. Effective January 1, 2017, the weighted-average expected rate of return on U.S. and foreign pension plan assets is 6.89% and 6.16%, respectively. The weighted-average expected rate of return on plan assets for our OPEB plans was 7.00% during 2016 and 2015. There has been no change to the assumed rate of return on OPEB plan assets effective January 1, 2017.

In projecting the rate of compensation increase, we consider past experience in light of movements in inflation rates. At December 31, 2016, the assumed weighted-average rate of compensation increase changed to 3.18% from 3.16% for our foreign pension plans.

In October 2015, the Society of Actuaries (“SOA”) published an updated Mortality Improvement Scale, MP-2015. The updated improvement scale incorporated two additional years of mortality data and reflected a trend toward somewhat smaller improvements in longevity. In addition, the SOA released a set of factors to adjust the RP-2014 Mortality Tables to base year 2006. We revised our mortality assumption to incorporate these updated mortality improvements for purposes of measuring our U.S. pension and OPEB obligations at December 31, 2015. In October 2016, the SOA published an updated Mortality Improvement Scale, MP-2016. The updated improvement scale incorporates three additional years of mortality data (2012 – 2014) and a modification of two other input values to improve the model’s year-over-year stability. We utilized the same base mortality, SOA RP-2014 Adjusted to 2006 Total Dataset Mortality, but we revised our mortality assumption to incorporate the MP-2016 Mortality Improvement Scale for purposes of measuring our U.S. pension and OPEB obligations at December 31, 2016.

At December 31, 2016, the assumed rate of increase in the pre-65 and post-65 per capita cost of covered health care benefits for U.S. retirees was zero as the employer-paid premium caps (pre-65 and post-65) were met starting January 1, 2013.

A variance in the assumptions discussed above would have an impact on the projected benefit obligations, the accrued OPEB liabilities, and the annual net periodic pension and OPEB cost. The following table reflects the sensitivities associated with a hypothetical change in certain assumptions, primarily in the U.S. (in thousands):

(Favorable) Unfavorable
1% Increase1% Decrease
Increase (Decrease) in Benefit ObligationIncrease (Decrease) in Benefit CostIncrease (Decrease) in Benefit ObligationIncrease (Decrease) in Benefit Cost
Actuarial Assumptions
Discount Rate:
Pension$(102,744)$3,671$124,185$(5,054)
Other postretirement benefits$(5,117)$265$6,128$(334)
Expected return on plan assets:
Pension*$(5,852)*$5,852
Other postretirement benefits*$(16)*$16
  • Not applicable.

Of the $609.2 million total pension and postretirement assets at December 31, 2016, $86.1 million, or approximately 14%, are measured using the net asset value as a practical expedient. Gains or losses attributable to these assets are recognized in the consolidated balance sheets as either an increase or decrease in plan assets. See Note 15, “Pension Plans and Other Postretirement Benefits” to our consolidated financial statements included in Part II, Item 8 of this report.

Income Taxes

We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. In order to record deferred tax assets and liabilities, we are following guidance under ASU 2015-17, which requires deferred tax assets and liabilities to be classified as noncurrent on the balance sheet, along with any related valuation allowance.

Albemarle Corporation and Subsidiaries

Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets are also provided for operating losses, capital losses and certain tax credit carryovers. A valuation allowance, reducing deferred tax assets, is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of such deferred tax assets is dependent upon the generation of sufficient future taxable income of the appropriate character. Although realization is not assured, we do not establish a valuation allowance when we believe it is more likely than not that a net deferred tax asset will be realized.

We only recognize a tax benefit after concluding that it is more likely than not that the benefit will be sustained upon audit by the respective taxing authority based solely on the technical merits of the associated tax position. Once the recognition threshold is met, we recognize a tax benefit measured as the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized. Interest and penalties related to income tax liabilities are included in Income tax expense on the consolidated statements of income.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Due to the statute of limitations, we are no longer subject to U.S. federal income tax audits by the Internal Revenue Service (“IRS”) for years prior to 2013. In 2016, the IRS finalized its audit of legacy Albemarle’s U.S. consolidated group for 2011 and 2012. Due to the statute of limitations, we also are no longer subject to U.S. state income tax audits prior to 2010.

With respect to jurisdictions outside the U.S., several audits are in process. During 2016, the German tax authorities continued and announced audits on multiple German subsidiaries that have since divested, for various years from 2006 through 2015. Also during 2016, audits of our Japanese, Taiwan, Singapore and Netherlands subsidiaries were closed with no issue. In addition, we have various audits ongoing for the years 2007 through 2014 related to Canada, Russia, India and Italy, all of which are entities that have since been divested.

While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

Since the timing of resolutions and/or closure of tax audits are uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $3.2 million as a result of closure of tax statutes. As a result of the sale of the Chemetall Surface Treatment business, we agreed to indemnify certain income and non-income tax liabilities, including uncertain tax positions, associated with the entities sold. The associated liability is recorded in Other noncurrent liabilities. See Note 16, “Other Noncurrent Liabilities,” and Note 20, “Income Taxes,” for further details.

We have designated the undistributed earnings of substantially all of our foreign operations as indefinitely reinvested and as a result we do not provide for deferred income taxes on the unremitted earnings of these subsidiaries. If it is determined that cash can be repatriated with little to no tax consequences, we may choose to repatriate cash at that time. Our foreign earnings are computed under U.S. federal tax earnings and profits (“E&P”) principles. In general, to the extent our financial reporting book basis over tax basis of a foreign subsidiary exceeds these E&P amounts, deferred taxes have not been provided, as they are essentially permanent in duration. The determination of the amount of such unrecognized deferred tax liability is not practicable. We provide for deferred income taxes on our undistributed earnings of foreign operations that are not deemed to be indefinitely invested.

Stock-based Compensation Expense

The fair value of restricted stock awards, restricted stock unit awards and performance unit awards with a service condition are determined based on the number of shares or units granted and the quoted price of our common stock on the date of grant, and the fair value of stock options is determined using the Black-Scholes valuation model. The fair value of performance unit awards with a service and a market condition are estimated on the date of grant using a Monte Carlo simulation model. The fair value of these awards is determined after giving effect to estimated forfeitures. Such value is recognized as expense over the service period, which is generally the vesting period of the equity grant. To the extent restricted stock awards, restricted stock unit awards, performance unit awards and stock options are forfeited prior to vesting in excess of the estimated forfeiture rate, the corresponding previously recognized expense is reversed as an offset to operating expenses.

Albemarle Corporation and Subsidiaries

Financial Condition and Liquidity

Overview

The principal uses of cash in our business generally have been capital investments, funding working capital, acquisitions and repayment of debt. We also make contributions to our defined benefit pension plans, pay dividends to our shareholders and 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 and inventory. We anticipate that cash on hand, cash provided by operating activities, proceeds from divestitures and long-term 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

Our cash and cash equivalents were $2.27 billion at December 31, 2016 as compared to $213.7 million at December 31, 2015. Cash provided by operating activities was $733.4 million, $360.7 million and $492.6 million during the years ended December 31, 2016, 2015 and 2014, respectively.

The increase in cash provided by operating activities in 2016 versus 2015 was primarily due to increased overall sales volumes and prices, lower fixed and variable costs, lower acquisition and integration related costs in connection with the Rockwood acquisition and lower payments for interest and taxes, partially offset by an increase in accounts receivable from higher sales in certain regions with longer payment terms, as compared to 2015. The decrease in cash provided by operating activities in 2015 versus 2014 was primarily due to higher acquisition and integration related costs in connection with the Rockwood acquisition, higher payments for interest and higher payments for income taxes in 2015, as compared to 2014.

During 2016, cash on hand, cash provided by operations and $3.33 billion of cash proceeds from divestitures funded $1.42 billion of debt repayments, $196.7 million of capital expenditures for plant, machinery and equipment, dividends to shareholders of $135.4 million, and pension and postretirement contributions of $20.1 million. Also during 2016, our consolidated joint venture, JBC, paid dividends of approximately $105 million, which resulted in dividends to noncontrolling interests of $35.9 million. During 2015, cash on hand, cash provided by operations, a return of capital from an unconsolidated investment and proceeds from borrowings funded $2.1 billion for acquisitions, $227.6 million of capital expenditures for plant, machinery and equipment, dividends to shareholders of $119.3 million, and pension and postretirement contributions of $21.6 million. Also during 2015, our consolidated joint venture, JBC, paid dividends of approximately $70 million, which resulted in dividends to noncontrolling interests of $23.3 million. During 2014, cash on hand, cash provided by operations and proceeds from divestitures funded payments of $150.0 million for repurchases of our common stock, $110.6 million of capital expenditures for plant, machinery and equipment, dividends to shareholders of $84.1 million, $33.4 million for the settlement of a forward starting interest rate swap, debt financing costs of $17.6 million and pension and postretirement contributions of $13.9 million. Also during 2014, our consolidated joint venture, JBC, paid dividends of approximately $51 million, which resulted in dividends to noncontrolling interests of $15.5 million. Additionally, in 2014 we issued a series of new senior notes totaling approximately $1.9 billion.

On December 14, 2016, we completed the previously announced sale of the Chemetall Surface Treatment business to BASF SE for cash proceeds of approximately $3.1 billion, net of purchase price adjustments. As a result of the sale, we have recorded a gain of $388.0 million before income taxes and a tax liability of $253.0 million related to the difference between the sales price and the proportionate carrying value of the interests sold. We have used the proceeds to significantly reduce leverage, including repaying the outstanding balance of the September 2015 Term Loan Agreement in full and approximately $153 million of Commercial Paper Notes in December 2016. In addition, through February 2017, we repaid the 3.00% Senior notes in full, €307.0 million of the 1.875% Senior notes and $174.7 million of the 4.50% Senior notes, as well as related redemption premiums of $45.2 million. We intend to use the remaining proceeds to invest heavily in the growth of the remaining businesses and return capital to shareholders.

On January 4, 2016, we closed the sale of our metal sulfides business to Treibacher Industrie AG. Included in the transaction were sites in Vienna and Arnoldstein, Austria, and Tribotecc’s proprietary sulfide syntheses process. We received net proceeds of approximately $137 million, which were used to repay a portion of the outstanding balance under the September 2015 Term Loan Agreement, and recorded a gain of $11.5 million before income taxes in 2016 related to the sale of this business.

Albemarle Corporation and Subsidiaries

On February 1, 2016, we closed the sale of our mineral-based flame retardants and specialty chemicals businesses to Huber Engineered Materials, a division of J.M. Huber Corporation. The transaction included Albemarle’s Martinswerk GmbH subsidiary and manufacturing facility located in Bergheim, Germany, and Albemarle’s 50% ownership interest in Magnifin Magnesiaprodukte GmbH, a joint-venture with Radex Heraklith Industriebeteiligung AG at Breitenau, Austria. We received net proceeds of approximately $187 million, which were used to repay a portion of the outstanding balance under the September 2015 Term Loan Agreement, and recorded a gain of $112.3 million before income taxes in 2016 related to the sale of these businesses.

Net current assets increased to approximately $2.17 billion at December 31, 2016 from $214.3 million at December 31, 2015, with the increase being primarily due to the proceeds from the sale of the Chemetall Surface Treatment business sold in December 2016, partially offset by the divestiture of the related net current assets held for sale. Included in net current assets at December 31, 2015 was $312.3 million of assets held for sale, net of related liabilities. Other changes in the components of net current assets are due to the timing of the sale of goods and other normal transactions leading up to the balance sheet dates and 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 normal course of business.

Capital expenditures were $196.7 million, $227.6 million and $110.6 million for the years ended December 31, 2016, 2015 and 2014, respectively, and were incurred mainly for plant, machinery and equipment. Capital expenditures for discontinued operations were $19.3 million and $23.7 million for the years ended December 31, 2016 and 2015, respectively. We expect our capital expenditures to approximate $375 million in 2017 for Lithium growth and capacity increases, productivity and continuity of operations projects. Of the total capital expenditures, our projects related to the continuity of operations is expected to remain in the range of 4-6% of net sales, similar to prior years.

During 2016, we incurred $52.1 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services, costs to achieve synergies, relocation costs, and other integration costs) and $5.3 million of costs in connection with other significant projects. In 2015, we incurred $123.9 million of acquisition and integration related costs directly related to the acquisition of Rockwood (mainly consisting of professional services and advisory fees, costs to achieve synergies, relocation costs, and other integration costs) and $8.4 million of costs in connection with other significant projects. In 2014, we incurred $23.6 million of acquisition and integration related costs directly related to the acquisition of Rockwood and $6.6 million of costs in connection with other significant projects.

During 2014 we repurchased approximately 2.2 million shares of our common stock pursuant to the terms of our Board authorized share repurchase program. All of the shares repurchased in 2014 were also repurchased pursuant to the terms of accelerated share repurchase agreements with major financial institutions. There were no shares of our common stock repurchased during 2015 or 2016. In November 2016, our Board of Directors authorized an increase in the number of shares the Company is permitted to repurchase under our share repurchase program, pursuant to which the Company is now permitted to repurchase up to a maximum of 15,000,000 shares, including those previously authorized but not yet repurchased.

On February 23, 2017, we increased our quarterly dividend rate to $0.32 per share, a 5% increase from the quarterly rate of $0.305 per share paid in 2016.

At December 31, 2016 and December 31, 2015, our cash and cash equivalents included $846.4 million and $200.7 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. For the years ended December 31, 2016, 2015 and 2014, we repatriated approximately $53.7 million, $122.5 million and $10.0 million of cash associated with earnings, respectively, 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.

Albemarle Corporation and Subsidiaries

Long-Term Debt

As of February 20, 2017, we have the following senior notes outstanding:

Issue Month/YearPrincipal (in millions)Interest RateInterest Payment DatesMaturity Date
December 2014€393.01.875%December 8December 8, 2021
November 2014$425.04.15%June 1December 1December 1, 2024
November 2014$350.05.45%June 1December 1December 1, 2044
December 2010$175.34.50%June 15December 15December 15, 2020

On December 14, 2016, we completed the previously announced sale of the Chemetall Surface Treatment business to BASF SE for cash proceeds of approximately $3.1 billion, net of purchase price adjustments. Through February 2017, we used a portion of the proceeds to repay the 3.00% Senior notes in full, €307.0 million of the 1.875% Senior notes and $174.7 million of the 4.50% Senior notes, as well as related tender premiums of $45.2 million.

Our senior notes are senior unsecured obligations and rank equally with all our other senior unsecured indebtedness from time to time outstanding. The senior notes are effectively subordinated to any 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 senior note outstanding has terms that allow us to redeem the notes before its 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 senior 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 the senior notes) plus between 25 and 40 basis points, depending on the note, 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. The senior 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.

Upon completion of the Rockwood acquisition, we assumed Rockwood’s senior notes with an aggregate principal amount of $1.25 billion. On October 15, 2015, our wholly-owned subsidiary, Rockwood Specialties Group, Inc., redeemed all of the outstanding 4.625% senior notes at a redemption price equal to 103.469% of the principal amount of the notes, representing a premium of $43.3 million, plus accrued and unpaid interest to the redemption date. The guarantees of the 4.625% senior notes and the senior notes we issued in 2014 were released upon repayment of the 4.625% senior notes.

The 4.625% senior notes we assumed from Rockwood were repaid with proceeds from a new term loan agreement we entered into on September 14, 2015 (the “September 2015 Term Loan Agreement”) with JPMorgan Chase Bank, N.A. (the “Administrative Agent”) and certain other lenders. The September 2015 Term Loan Agreement provided for borrowings under a 364-day term loan facility (the “364-Day Facility”) and a five-year term loan facility (the “Five-Year Facility”), or collectively, the “Term loan facilities.” During the year ended December 31, 2016, the Company repaid the 364-Day Facility and Five-Year Facility in full, primarily with proceeds from the sales of the Chemetall Surface Treatment business, the metal sulfides business and the minerals-based flame retardants and specialty chemicals business. The interest rate on both Term loan facilities was LIBOR plus 1.375%.

Our revolving, unsecured credit agreement dated as of February 7, 2014, as amended, (the “February 2014 Credit Agreement”) currently provides for borrowings of up to $1.0 billion and matures on February 7, 2020. Borrowings bear interest at variable rates based on the LIBOR for deposits in the relevant currency plus an applicable margin which ranges from 1.000% to 1.700%, depending on the Company’s credit rating from Standard & Poor’s Ratings Services (“S&P”), Moody’s Investors Services (“Moody’s”) and Fitch Ratings (“Fitch”). The applicable margin on the facility was 1.300% as of December 31, 2016. There were no borrowings outstanding under the February 2014 Credit Agreement as of December 31, 2016.

Borrowings under the February 2014 Credit Agreement are conditioned upon compliance with the following covenants: (a) consolidated funded debt, as defined in the agreement, must be less than or equal to 3.50 times consolidated EBITDA, as defined in the agreement, which reflects adjustments for certain non-recurring or unusual items such as restructuring charges, facility divestiture charges and other significant non-recurring items (herein “consolidated adjusted EBITDA” or “adjusted EBITDA”), as of the end of any fiscal quarter; (b) with the exception of certain liens as specified in the agreement, liens may not attach to assets when the aggregate amount of all indebtedness secured by such liens plus unsecured subsidiary indebtedness, other than indebtedness incurred by our subsidiaries under the February 2014 Credit Agreement, would exceed 20% of consolidated net worth, as defined in the agreement; and (c) with the exception of certain indebtedness as specified in

Albemarle Corporation and Subsidiaries

the agreement, subsidiary indebtedness may not exceed the difference between 20% of consolidated net worth, as defined in the agreement, and indebtedness secured by liens permitted under the agreement.

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. Our February 2014 Credit Agreement is available to repay the Commercial Paper Notes, if necessary. Aggregate borrowings outstanding under the February 2014 Credit Agreement and the Commercial Paper Notes will not exceed the $1.0 billion current maximum amount available under the February 2014 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. Using a portion of the proceeds from the sale of the Chemetall Surface Treatment business, we repaid approximately $153 million of Commercial Paper Notes in December 2016. At December 31, 2016, we had $247.5 million of Commercial Paper Notes outstanding bearing a weighted-average interest rate of approximately 1.46% and a weighted-average maturity of 37 days. The Commercial Paper Notes are classified as Current portion of long-term debt in our consolidated balance sheets at December 31, 2016 and December 31, 2015.

The non-current portion of our long-term debt amounted to $2.12 billion at December 31, 2016, compared to $3.14 billion at December 31, 2015. The decrease is attributable to the term loan repaid with the proceeds from the sale of the Chemetall Surface Treatment business in December 2016. In addition, at December 31, 2016, we had the ability to borrow $752.5 million under our commercial paper program and the February 2014 Credit Agreement, and $221.0 million under other existing lines of credit, subject to various financial covenants under our February 2014 Credit Agreement. We have the ability and intent to refinance our borrowings under our other existing credit lines with borrowings under the February 2014 Credit Agreement, as applicable. Therefore, the amounts outstanding under those credit lines, if any, are classified as long-term debt. We believe that as of December 31, 2016 we were, and currently are, in compliance with all of our debt covenants. For additional information about our long-term debt obligations, see Note 14, “Long-Term Debt,” to our consolidated financial statements included in Part II, Item 8 of this report.

Off-Balance Sheet Arrangements

In the normal 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 $51.3 million at December 31, 2016. None of these off-balance sheet arrangements has, or is likely to have, a material effect on our current or future financial condition, results of operations, liquidity or capital resources.

Other Obligations

The following table summarizes our contractual obligations for capital projects, various take or pay and throughput agreements, long-term debt, operating leases and other commitments as of December 31, 2016 (in thousands):

20172018201920202021Thereafter
Long-term debt obligations(a)$247,544$—$250,000$388,939$727,440$775,000
Expected interest payments on long-term debt obligations(b)53,82153,95053,89150,52643,217475,464
Operating lease obligations (rental)12,06510,1537,8786,3695,49019,240
Take or pay / throughput agreements(c)34,56914,47412,42011,47010,91927,656
Letters of credit and guarantees23,6195,05279519931521,357
Capital projects44,3641421091012545
Total$415,982$83,771$325,093$457,513$787,393$1,319,262
(a)Amounts represent the expected principal payments of our long-term debt and do not include any fair value adjustments, premiums or discounts. In the first quarter of 2017, we have repaid approximately $743.7 million of senior notes using a portion the proceeds from the sale of the Chemetall Surface Treatment business. This will reduce our long-term debt obligation in the above table by $250.0 million in 2019, $174.7 million in 2020 and $319.0 million in 2021.
(b)Interest on our fixed rate borrowings was calculated based on the stated rates of such borrowings. A weighted average interest rate of approximately 1.60% was used for our remaining long-term debt obligations. In the first quarter of 2017, we have repaid approximately
Albemarle Corporation and Subsidiaries

$743.7 million of senior notes using the proceeds from the sale of the Chemetall Surface Treatment business. As a result of the repayments, interest payments will be reduced by approximately $21 million annually.

(c)These amounts primarily relate to contracts entered into with certain third party vendors in the normal course of business to secure raw materials for our production processes. In order to secure materials, sometimes for long durations, these contracts mandate a minimum amount of product to be purchased at predetermined rates over a set timeframe.

Amounts in the table above exclude required employer pension contributions. Contributions to our domestic and foreign qualified and nonqualified pension plans, including our supplemental executive retirement plan (“SERP”), are expected to approximate $10 million in 2017. We may choose to make additional pension contributions in excess of this amount. We made contributions of approximately $12.2 million to our domestic and foreign pension plans for continuing operations (both qualified and nonqualified) during the year ended December 31, 2016.

The liability related to uncertain tax positions, including interest and penalties, recorded in Other noncurrent liabilities totaled $27.9 million and $101.7 million at December 31, 2016 and 2015, respectively. Related assets for corresponding offsetting benefits recorded in Other assets totaled $15.1 million and $50.9 million at December 31, 2016 and 2015, respectively. We cannot estimate the amounts of any cash payments during the next twelve months associated with these liabilities and are unable to estimate the timing of any such cash payments in the future at this time.

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 over the next three years, in terms of uses of cash, will be investing in growth of the businesses and the return of 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 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.

While we maintain business relationships with a diverse group of financial institutions, an adverse change in their credit standing could lead them to not honor their contractual credit commitments, decline funding under existing but uncommitted lines of credit, not renew their extensions of credit or not provide new financing. While the global corporate bond and bank loan markets remain strong, periods of elevated uncertainty related to 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. When 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.

Overall, with generally strong cash-generative businesses and no significant long-term debt maturities before 2020, we believe we have and will maintain a solid liquidity position.

We had cash and cash equivalents totaling $2.3 billion as of December 31, 2016, of which $846.4 million is held by our foreign subsidiaries. This cash represents an important source of our liquidity and is invested in short-term investments including time deposits and readily marketable securities with relatively short maturities. 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.

Safety and Environmental Matters

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 results.

Albemarle Corporation and Subsidiaries

Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a 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.

Our environmental and safety operating costs charged to expense were $34.4 million, $39.5 million and $35.7 million in 2016, 2015 and 2014, respectively, excluding depreciation of previous capital expenditures, and are expected to be in the same range in the next few years. Costs for remediation have been accrued and payments related to sites are charged against accrued liabilities, which at December 31, 2016 totaled approximately $34.9 million, an increase of $3.5 million from $31.4 million at December 31, 2015. See Note 17, “Commitments and Contingencies” to our consolidated financial statements included in Part II, Item 8 of this report for a reconciliation of our environmental liabilities for the years ended December 31, 2016, 2015 and 2014.

We believe that any sum we may be required to pay in connection with environmental remediation and asset retirement obligation matters in excess of the amounts recorded should occur over a period of time and should 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.

Capital expenditures for pollution-abatement and safety projects, including such costs that are included in other projects, were approximately $28.8 million, $18.6 million and $15.2 million in 2016, 2015 and 2014, respectively. In the future, capital expenditures for these types of projects may increase due to more stringent environmental regulatory requirements and our efforts in reaching sustainability goals. Management’s estimates of the effects of compliance with governmental pollution-abatement and safety regulations are subject to (a) the possibility of changes in the applicable statutes and regulations or in judicial or administrative construction of such statutes and regulations and (b) uncertainty as to whether anticipated solutions to pollution problems will be successful, or whether additional expenditures may prove necessary.

Recently Issued Accounting Pronouncements

See Note 1, “Summary of Significant Accounting Policies” to our consolidated financial statements included in Part II, Item 8 of this report for a discussion of our Recently Issued Accounting Pronouncements.

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