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. There can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially from the outlook expressed or implied in any forward-looking statement include, without limitation:

•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;
Albemarle Corporation and Subsidiaries
•limitations or prohibitions on the manufacture and sale of our products;
•availability of raw materials;
•increases in the cost of raw materials and energy, and our ability to pass through such increases to our customers;
•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 our results of operations for the years ended December 31, 2017, 2016 and 2015. A discussion of our 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 are designed to meet our customers’ needs across a diverse range of end markets. The end markets we serve include energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection 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 of our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace. We believe our disciplined cost reduction efforts and ongoing productivity improvements, among other factors, position us well to take advantage of strengthening economic conditions as they occur, while softening the negative impact of the current challenging global economic environment.

Albemarle Corporation and Subsidiaries

2017 Highlights

•In the first quarter, we increased our quarterly dividend for the 23rd consecutive year, to $0.32 per share.
•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 tender premiums of $45.2 million, using a portion of the proceeds from the sale of the Chemetall Surface Treatment business.
•We announced that Albemarle and Tianqi Lithium Corporation (“Tianqi”) terminated the option agreement for Tianqi to acquire a 20% indirect ownership interest in Rockwood Lithium GmbH, a wholly-owned German subsidiary of Albemarle, and its subsidiaries. As a result, we will retain 100% of the ownership interest in Rockwood Lithium GmbH.
•We announced the approval for the expansion of lithium concentrate production at our Greenbushes, Australia site through our 49% owned Talison joint venture. Commissioning of the expansion is expected to begin in the second quarter of 2019 and would more than double the current lithium carbonate capacity.
•We completed a $250 million accelerated share repurchase (“ASR”) program, receiving and retiring 2,341,083 shares of our common stock pursuant to the terms of the ASR agreement and our share repurchase program.
•We announced that we have developed an innovative technology that could lead to a sustainable increase in total lithium production in Chile to as much as 125,000 metric tons of lithium carbonate equivalent annually, without the need for additional brine pumping at the Salar de Atacama. As a result of this development, we have requested that Chile’s Economic Development Agency (“CORFO”) increase our lithium quota. As of the date of this Annual Report, CORFO is yet to conclude on the Company’s request.
•In November 2017, we announced that during the first quarter of 2018, the PCS product category will merge with the Refining Solutions reportable segment to form a global business focused on catalysts. As a result, our three reportable segments will include: (1) Lithium, (2) Bromine Specialties and (3) Catalysts.
•On December 14, 2017, we signed a definitive agreement to sell the polyolefin catalysts and components portion of our PCS business to W.R. Grace & Co. for proceeds of approximately $416 million in cash. The transaction includes Albemarle’s Product Development Center located in Baton Rouge, Louisiana, and operations at its Yeosu, South Korea site, and is expected to close in the first quarter of 2018.
•We announced a new technology for the FCC catalyst market called Granite™. The Granite™ technology expands the catalyst formulation window and enables refiners to maximize their profitability through better bottoms upgrading, improved coke selectivity, and higher zeolite stability while achieving targeted product yields.
•We achieved earnings from continuing operations of $99.5 million during 2017 as compared to $478.6 million for 2016. Cash flows from operations in 2017 were $304.0 million. Earnings from continuing operations for 2017 includes pension and other postretirement benefit (“OPEB”) actuarial gains of $7.3 million after income taxes, compared to pension and OPEB actuarial losses of $18.3 million after income taxes in 2016.

Outlook

The current global business environment presents a diverse set of opportunities and challenges in the markets we serve. In particular, the market for lithium battery and energy storage continues to accelerate, providing the opportunity to continue to develop high quality and innovative products while managing the high cost of expanding capacity. The other markets we serve continue to present various opportunities for value and growth as we have positioned ourselves to manage changing global conditions, such as slow and uneven global growth, currency exchange volatility, crude oil price fluctuation, a dynamic pricing environment and an ever-changing landscape in electronics, the continuous need for cutting edge catalysts and technology by our refinery customers and increasingly stringent environmental standards. Amidst these dynamics, we believe our business fundamentals are sound and that we are strategically well-positioned as we remain focused on increasing sales volumes, optimizing and improving the value of our portfolio primarily through pricing and product development, managing costs and delivering value to our customers and shareholders. We believe that our businesses remain well-positioned to capitalize on new business opportunities and long-term trends driving growth within our end markets and to respond quickly to changes in economic conditions in these markets.

In 2017, our operations were managed and reported under three reportable segments: Lithium and Advanced Materials, Bromine Specialties and Refining Solutions. Financial results and discussion about our segments included in this Annual Report on Form 10-K are organized according to these categories except where noted.

Lithium and Advanced Materials: We expect continued strong year over year growth for the remainder of 2018 in Lithium, led by continued strong demand in battery-grade applications, price improvement and increased conversion capacity. In 2017, PCS experienced weaker profitability due to pricing pressure and the impact of hurricane Harvey, partially offset by

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productivity and cost savings initiatives. We expect PCS profitability to stabilize in 2018 due to productivity gains and increased volumes due to market demand, offset by unfavorable pricing due to excess supply.

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, against a favorable backdrop of steadily declining electric battery costs, increasing electric battery performance and constructive global public policy toward acceptance of e-mobility/renewables. Our long-term outlook is also bolstered by our successful negotiation of long-term supply agreements with a number of strategic customers, reflecting our standing as a preferred global lithium partner due to our scale, access to geographically diverse, low cost resources and long-term execution track record. In PCS, we expect growth in the organometallic business due to growing global demand for plastics driven by rising standards of living and infrastructure spending.

On December 14, 2017, we signed a definitive agreement to sell the polyolefin catalysts and components portion of the PCS business to W.R. Grace & Co. for proceeds of approximately $416 million in cash. The sale is expected to close in the first quarter of 2018, subject to the satisfaction of customary closing conditions, including approvals from regulatory authorities. In addition, during the first quarter of 2018, the PCS product category will merge with the Refining Solutions reportable segment to form a global business focused on catalysts and be reported in a separate reportable segment.

Bromine Specialties: The Bromine Specialties business had a solid 2017, with strong volume growth in fire safety and other derivatives driving double digit earnings growth year over year. We expect to see relatively flat growth on net sales and profitability in 2018. 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 2018, the short-term impact will be to increase raw material costs. Offshore well completions lag oil pricing, so any benefit in completion fluid volumes would likely extend into 2019. We are expecting relatively stable fire safety and other derivative net sales and profits in 2018.

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 a year of significant increases in the number of “Hydro treating unit” catalyst change-outs and marked improvement in catalyst product mix, our CFT business performed as expected. Our FCC business also performed as expected, despite impacts from hurricane Harvey. Both businesses faced headwinds from rising raw material costs in 2017 and we expect that trend to continue in 2018.

On a longer term basis, we believe increased global demand for transportation fuels, new refinery start-ups and ongoing adoption of cleaner fuels will be the primary drivers of growth in our Refining Solutions business. We believe delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry. We believe our technologies continue to provide significant performance and financial benefits to refiners challenged to meet tighter regulations around the world, including those managing new contaminants present in North America tight oil, and those in the Middle East and Asia seeking to use heavier feedstock while pushing for higher propylene yields. Longer term, we believe that the global crude supply will get heavier and more sour, a trend that bodes well for our catalysts portfolio. With superior technology and production capacities, and expected growth in end market demand, we believe that Refining Solutions remains well-positioned for the future.

All Other: The fine chemistry services business will continue to be reported outside the Company’s reportable segments as it does not fit in the Company’s core businesses. We expect the next few years to be a challenge for fine chemistry services due to a challenging agriculture industry environment, as well as customer order timing in pharmaceuticals.

Corporate: We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2018 to be between 23% and 24%; however, our rate will vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in the U.S. and other tax jurisdictions. In December 2017, the TCJA was signed into law in the U.S., which among other things, lowers the U.S.

Albemarle Corporation and Subsidiaries

corporate income tax rate from 35% to 21%, implementing a territorial tax system for non-U.S. earnings and imposing a one-time transition tax on the undistributed earnings of certain non-U.S. subsidiaries. We also anticipate the potential for increased volatility in future effective tax rates from the continuing impact of the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, which was adopted in the first quarter of 2017.

In the first quarter of 2018, we increased our quarterly dividend rate to $0.335 per share. During 2017, we received and retired approximately 2.3 million shares of our common stock under our share repurchase program and the ASR agreement, and we may periodically repurchase shares in the future on an opportunistic basis as approved by our share repurchase program.

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, 2017 include an actuarial gain of $11.4 million ($7.3 million after income taxes), as compared to a loss of $26.7 million ($18.3 million after income taxes) from continuing operations for the year ended December 31, 2016.

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.

Albemarle Corporation and Subsidiaries

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
2017201620152017 vs. 20162016 vs. 2015
(In thousands, except percentages and per share amounts)
NET SALES$3,071,976$2,677,203$2,826,42915%(5)%
Cost of goods sold1,961,9961,706,6271,966,19615%(13)%
GROSS PROFIT1,109,980970,576860,23314%13%
GROSS PROFIT MARGIN36.1%36.3%30.4%
Selling, general and administrative expenses437,901380,464300,44015%27%
Research and development expenses84,33080,47589,1875%(10)%
Restructuring and other, net——(6,804)—%(100)%
Gain on sales of businesses, net—(122,298)—(100)%*
Acquisition and integration related costs—57,384132,299(100)%(57)%
OPERATING PROFIT587,749574,551345,1112%66%
OPERATING PROFIT MARGIN19.1%21.5%12.2%
Interest and financing expenses(115,350)(65,181)(81,650)77%(20)%
Other (expenses) income, net(25,601)5,89447,283*(88)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS446,798515,264310,744(13)%66%
Income tax expense431,81796,26311,134349%*
Effective tax rate96.6%18.7%3.6%
INCOME FROM CONTINUING OPERATIONS BEFORE EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS14,981419,001299,610(96)%40%
Equity in net income of unconsolidated investments (net of tax)84,48759,63727,97842%113%
NET INCOME FROM CONTINUING OPERATIONS99,468478,638327,588(79)%46%
Income from discontinued operations (net of tax)—202,13132,476(100)%*
NET INCOME99,468680,769360,064(85)%89%
Net income attributable to noncontrolling interests(44,618)(37,094)(25,158)20%47%
NET INCOME ATTRIBUTABLE TO ALBEMARLE CORPORATION$54,850$643,675$334,906(91)%92%
NET INCOME FROM CONTINUING OPERATIONS AS A PERCENTAGE OF NET SALES3.2%17.9%11.6%
Basic earnings per share:
Continuing operations$0.49$3.93$2.72(88)%44%
Discontinued operations—1.800.29(100)%*
$0.49$5.73$3.01(91)%90%
Diluted earnings per share:
Continuing operations$0.49$3.90$2.71(87)%44%
Discontinued operations—1.780.29(100)%*
$0.49$5.68$3.00(91)%89%
  • Percentage calculation is not meaningful.
Albemarle Corporation and Subsidiaries

Comparison of 2017 to 2016

Net Sales

For the year ended December 31, 2017, we recorded net sales of $3.07 billion, a 15% increase compared to net sales of $2.68 billion for the corresponding period of 2016. Net sales increased due to $272.2 million of higher volumes, $157.8 million of favorable pricing impacts and $3.4 million of favorable currency exchange impacts, partially offset by the $38.6 million impact of the sale of the minerals-based flame retardants and specialty chemicals business.

Gross Profit

For the year ended December 31, 2017, our gross profit increased $139.4 million, or 14%, compared to the corresponding period of 2016. Included in Cost of goods sold for the year ended December 31, 2017 are: (1) a $23.1 million charge related to the markup of inventory purchased as part of the acquisition of the lithium hydroxide and lithium carbonate conversion business of Jiangli New Materials; (2) $14.3 million of acquisition and integration related costs resulting from the Jiangli New Materials acquisition; and (3) restructuring costs of $2.9 million related to a plan to reduce costs at several locations. In addition, gross profit decreased $3.1 million related to the divested minerals-based flame retardants and specialty chemicals business in the first quarter of 2016. Excluding the impact of these items, gross profit increased by $182.8 million, or 19%, due primarily to higher overall sales volumes and favorable price impacts, partially offset by increased costs in Lithium and a $15.4 million negative impact from hurricane Harvey. Overall, these factors contributed to a gross profit margin for the years ended December 31, 2017 and 2016 of 36.1% and 36.3%, respectively. Excluding the impact of the charges noted above, gross profit margin was 37.4% for the year ended December 31, 2017 as compared to 36.7% for the year ended December 31, 2016.

Selling, General and Administrative Expenses

For the year ended December 31, 2017, our selling, general and administrative (“SG&A”) expenses increased $57.4 million, or 15%, from the year ended December 31, 2016. SG&A expenses for 2017 included approximately $10.0 million of pension and OPEB benefits (including mark-to-market actuarial gains of $8.8 million) allocated to SG&A expenses, as compared to $29.3 million of pension and OPEB costs (including mark-to-market actuarial losses of $26.3 million) allocated to SG&A expenses in 2016. In addition, the year ended December 31, 2017 includes $19.6 million of acquisition and integration related costs, primarily resulting from the acquisition of Jiangli New Materials, $8.4 million of restructuring costs related to several locations, primarily our Lithium sites in Germany and $3.3 million of multiemployer plan financial improvement plan shortfall contributions for our employees. Excluding the impact of these charges and the mark-to-market actuarial gains and losses, SG&A expenses increased by $61.2 million, or 17%, primarily due to increased compensation costs, Lithium growth spending and professional fees, partially offset by savings from our restructuring. As a percentage of net sales, SG&A expenses were 14.3% in 2017, compared to 14.2% in 2016. Excluding the impact of these charges and the mark-to-market actuarial gains and losses, SG&A expenses as a percentage of net sales were 13.5% in 2017 and 13.2% in 2016.

The mark-to-market actuarial gain in 2017 is primarily attributable to a higher return on pension plan assets in 2017 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 14.31% versus an expected return of 6.73%. The mark-to-market actuarial gain in 2017 was partially offset by a decrease in the weighted-average discount rate to 4.03% from 4.43% for our U.S. pension plans and to 1.94% from 2.00% for our foreign pension plans to reflect market conditions as of the December 31, 2017 measurement date.

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 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%.

Research and Development Expenses

For the year ended December 31, 2017, our R&D expenses increased $3.9 million, or 5%, from the year ended December 31, 2016. Included in R&D expenses for the year ended December 31, 2017 are $5.7 million of restructuring costs related to our Lithium sites in Germany. As a percentage of net sales, R&D expenses were 2.7% in 2017, compared to 3.0% in 2016.

Albemarle Corporation and Subsidiaries

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

Acquisition and integration related costs for the year ended December 31, 2017 are reported in Cost of goods sold and SG&A expenses, as noted above. 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.

Interest and Financing Expenses

Interest and financing expenses for the year ended December 31, 2017 increased $50.2 million to $115.4 million from the corresponding 2016 period, due mainly to a loss of $52.8 million on early extinguishment of debt related to the tender premiums, fees, unamortized discounts and unamortized deferred financing costs from the repayment of 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.

Other (Expenses) Income, Net

Other (expenses) income, net, for the year ended December 31, 2017 was ($25.6) million versus $5.9 million for the corresponding 2016 period. During the year ended December 31, 2017, we recorded a $28.7 million reserve recorded against a note receivable in one of our European entities no longer deemed probable of collection, $3.2 million of asset retirement obligation charges related to the revision of an estimate at a site formerly owned by Albemarle, losses of $4.1 million related to the final settlements of previously disposed businesses and the revision of tax indemnification expenses of $3.7 million primarily related to the filing of tax returns and a competent authority agreement for a previously disposed business. This is partially offset by a $10.6 million gain related to the reversal of liabilities recorded as part of purchase accounting from a previous acquisition, a $6.2 million gain related to the acquisition of the 50% interest of an equity investment and $1.1 million related to a reversal of a liability associated with the previous disposal of a property in 2017. The remaining change was primarily due to an increase in foreign exchange losses of $13.5 million and a $2.9 million gain in the fair value of our investment in private equity securities recorded during the third quarter of 2016.

Income Tax Expense

The effective income tax rate for 2017 was 96.6% compared to 18.7% for 2016. Our effective income tax rate for 2017 was primarily affected by the enactment of the TCJA in December 2017. The tax effects of the TCJA are recorded in connection with the one-time transition tax expense of $429.2 million, partially offset by the remeasurement of deferred tax assets and liabilities due to a decrease in corporate tax rate from 35% to 21% of $62.3 million tax benefit. Exclusive of the enactment of the TCJA, the Company’s effective tax rate differs from the U.S. Federal statutory income tax rate due to the impact of earnings from outside the U.S., mainly attributable to our share of the income of our JBC joint venture, a Free Zones company under the laws of the Hashemite Kingdom of Jordan. In addition, income tax expense for the year ended December 31, 2017, included foreign rate changes of $16.2 million and a $5.1 million out-of-period adjustment due to changes in our deferred tax liabilities for basis differences in Chilean fixed assets offset by a $10.9 million benefit from the release of valuation allowances due to a foreign restructuring plan that was initiated during the second quarter of 2017 and a $8.8 million benefit from excess tax benefits realized from stock-based compensation arrangements.

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. 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 2017 and 2016.

Equity in Net Income of Unconsolidated Investments

Equity in net income of unconsolidated investments was $84.5 million for the year ended December 31, 2017 compared to $59.6 million in the same period last year. This increase of $24.9 million was primarily due to higher equity income reported by our Lithium and Advanced Materials segment joint venture Windfield Holdings Pty. Ltd. resulting from favorable pricing and volumes in our lithium business.

Albemarle Corporation and Subsidiaries

Income from Discontinued Operations (Net of Tax)

The year ended December 31, 2016 income from discontinued operations, after income taxes, of $202.1 million 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.

Net Income Attributable to Noncontrolling Interests

For the year ended December 31, 2017, net income attributable to noncontrolling interests was $44.6 million compared to $37.1 million in the same period of 2016. This increase of $7.5 million was due primarily to changes in consolidated income related to our JBC joint venture resulting from higher sales volumes.

Net Income Attributable to Albemarle Corporation

Net income attributable to Albemarle Corporation decreased to $54.9 million for the year ended December 31, 2017, from $643.7 million for the corresponding period of 2016. The year ended December 31, 2017 was negatively impacted by the one-time transition tax expense of $429.2 million recorded as a result of the enactment of the TCJA in December 2017. In addition, the year ended December 31, 2017 included a $52.8 million loss on early extinguishment of debt and $17.1 million of restructuring and other costs, while 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. Excluding these items, net income attributable to Albemarle increased by $160.8 million. The increase was primarily due to the increase in gross profit from higher overall sales volumes and favorable price impacts, the remeasurement of deferred tax assets and liabilities due to a decrease in corporate tax rate from 35% to 21% of $62.3 million tax benefit resulting from the enactment of the TCJA, and lower acquisition and integration related costs, partially offset by an increase in SG&A expenses, income before taxes from discontinued operations in 2016 and the negative impact of hurricane Harvey.

Other Comprehensive Income, Net of Tax

Total other comprehensive income, after income taxes, was $187.6 million in 2017 compared to $8.3 million in 2016. This change is primarily due to changes in foreign currency translations. We translate our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In 2017, other comprehensive income from foreign currency translation adjustments was $227.4 million, mainly as a result of favorable movements in the European Union Euro of approximately $192 million, the Korean Won of approximately $16 million, the Chinese Renminbi of approximately $13 million and the Taiwan Dollar of approximately $4 million. Also included in total other comprehensive income for 2017 is a loss of $41.8 million in connection with the revaluation of our Euro-based 1.875% Senior notes which have been designated as a hedge of our net investment in foreign operations. 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 Euro-based 1.875% Senior notes which have been 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 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. 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

Albemarle Corporation and Subsidiaries

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
2017%2016%2017 vs. 2016
(In thousands, except percentages)
Net sales:
Lithium and Advanced Materials$1,308,15342.6%$968,21636.2%35%
Bromine Specialties855,14327.8%792,42529.6%8%
Refining Solutions778,30425.3%732,13727.3%6%
All Other128,9144.2%180,9886.8%(29)%
Corporate1,4620.1%3,4370.1%(57)%
Total net sales$3,071,976100.0%$2,677,203100.0%15%
Adjusted EBITDA:
Lithium and Advanced Materials$518,53058.6%$363,36048.0%43%
Bromine Specialties258,90129.2%226,92629.9%14%
Refining Solutions212,00523.9%238,96331.5%(11)%
All Other13,8781.6%14,7721.9%(6)%
Corporate(117,834)(13.3)%(85,804)(11.3)%37%
Total adjusted EBITDA$885,480100.0%$758,217100.0%17%
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
2017
Net income (loss) attributable to Albemarle Corporation$400,360$218,839$173,297$792,496$5,521$(743,167)$54,850
Depreciation and amortization102,38940,06239,958182,4098,3576,162196,928
Utilization of inventory markup(a)23,095——23,095——23,095
Restructuring and other(b)—————17,05617,056
Gain on acquisition(c)(6,221)——(6,221)——(6,221)
Acquisition and integration related costs(d)—————33,95433,954
Interest and financing expenses(e)—————115,350115,350
Income tax expense—————431,817431,817
Non-operating pension and OPEB items—————(16,125)(16,125)
Multiemployer plan shortfall contributions(f)—————7,8877,887
Note receivable reserve(g)—————28,73028,730
Other(h)(1,093)—(1,250)(2,343)—502(1,841)
Adjusted EBITDA$518,530$258,901$212,005$989,436$13,878$(117,834)$885,480
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(i)————(123,831)1,533(122,298)
Acquisition and integration related costs(j)—————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(k)—————3,5793,579
Adjusted EBITDA$363,360$226,926$238,963$829,249$14,772$(85,804)$758,217
(a)In connection with the acquisition of Jiangli New Materials, the Company valued inventory purchased from Jiangli New Materials at fair value, which resulted in a markup of the underlying net book value of the inventory totaling approximately $23.1 million. The utilization of this inventory markup was included in Costs of goods sold during the year ended December 31, 2017, the estimated remaining selling period.
(b)During 2017, we initiated action to reduce costs in each of our reportable segments at several locations, primarily at our Lithium sites in Germany. Based on the restructuring plans, we have recorded expenses of $2.9 million in Cost of goods sold, $8.4 million in SG&A expenses, and $5.7 million in Research and development expenses, primarily related to restructuring costs. The unpaid balance is recorded in Accrued expenses at December 31, 2017, with the expectation that the majority of these plans will be completed by the end of 2018.
(c)Gain recorded in Other (expenses) income, net related to the acquisition of the remaining 50% interest in Salmag. See Note 2, “Acquisitions,” to our consolidated financial statements included in Part II, Item 8 of this report for additional information.
(d)Acquisition and integration related costs of $14.3 million and $19.6 million were included in Cost of goods sold and SG&A expenses, respectively, for the year ended December 31, 2017 primarily resulting from the Jiangli New Materials acquisition, including unusual compensation related costs negotiated specifically as a result of this acquisition that are outside the Company’s normal compensation arrangements.
(e)Included in Interest and financing expenses is a loss on early extinguishment of debt of $52.8 million. See Note 14, “Long-Term Debt,” to our consolidated financial statements included in Part II, Item 8 of this report for additional information.
Albemarle Corporation and Subsidiaries
(f)Included in SG&A expenses is $3.3 million for additional capital reserve contributions to a multiemployer plan, which is subject to a financial improvement plan. In addition, additional capital reserve contributions for this multiemployer plan of $4.6 million, included in Other (expenses) income, net, have been made to indemnify previously divested businesses.
(g)Reserve recorded in Other (expenses) income, net against a note receivable on one of our European entities no longer deemed probable of collection.
(h)Included amounts for the year ended December 31, 2017 recorded in:
▪Cost of goods sold - $1.3 million reversal of deferred income related to an abandoned project at an unconsolidated investment.
▪Selling, general and administrative expenses - $1.0 million related to a reversal of an accrual recorded as part of purchase accounting from a previous acquisition.
▪Other (expenses) income, net - $3.2 million of asset retirement obligation charges related to the revision of an estimate at a site formerly owned by Albemarle, losses of $4.1 million related to the final settlements of previously disposed businesses, the revision of tax indemnification expenses of $3.7 million primarily related to the filing of tax returns and a competent authority agreement for a previously disposed business and $1.0 million related to the settlement of a legal claim. This is partially offset by gains of $10.6 million and $1.1 million related to the reversal of liabilities recorded as part of purchase accounting from a previous acquisition and the previous disposal of a property, respectively.
(h)See “Gain on Sales of Businesses, Net” on page 34 for a description of these items.
(i)See “Acquisition and Integration Related Costs” on page 34 for a description of these items.
(j)Included amounts for the year ended December 31, 2016 recorded in:
▪Research and development expenses - $1.4 million related to the write-off of fixed assets in China.
▪Selling, general and administrative expenses - $0.9 million related to the net loss on the sales of properties.
▪Other (expenses) income, net - $2.4 million related to environmental charges related to a site formerly owned by Albemarle, partially offset by a gain related to a previously disposed of site in China of $1.1 million.

Lithium and Advanced Materials

Lithium and Advanced Materials segment net sales for the year ended December 31, 2017 were $1.3 billion, up $339.9 million, or 35%, compared to the corresponding period of 2016. The increase was primarily driven by $163.2 million of favorable Lithium sales volumes, largely from battery grade applications, due to market demand and $186.3 million of favorable Lithium price impacts due primarily to price increases in our battery grade lithium salts. The increase was partially offset by $10.2 million of unfavorable PCS volumes and price impacts, primarily due to weakness in the organometallics product family and the bankruptcy filing of one of our customers. Adjusted EBITDA for Lithium and Advanced Materials increased 43%, or $155.2 million, to $518.5 million for the year ended December 31, 2017, compared to the corresponding period of 2016, primarily due to favorable pricing and higher overall sales volumes, partially offset by Lithium growth spending, a $3.5 million negative impact from hurricane Harvey on PCS and $0.6 million of unfavorable currency translation impacts.

Bromine Specialties

Bromine Specialties segment net sales for the year ended December 31, 2017 were $855.1 million, up $62.7 million, or 8%, compared to the corresponding period of 2016. The increase was driven primarily by $60.4 million of higher sales volumes due to strong demand in flame retardants and reduced production in 2017 by Chinese bromine companies, and $2.3 million of favorable pricing on certain bromine derivatives. Adjusted EBITDA for Bromine Specialties increased 14%, or $32.0 million, to $258.9 million for the year ended December 31, 2017, compared to the corresponding period of 2016, primarily due to higher overall sales volumes and favorable pricing, partially offset by higher variable and fixed costs and a $1.5 million negative impact from hurricane Harvey.

Refining Solutions

Refining Solutions segment net sales for the year ended December 31, 2017 were $778.3 million, an increase of $46.2 million, or 6%, compared to the corresponding period of 2016. This increase was primarily due to $50.0 million of higher volumes from strong demand in our customer base and $2.7 million of favorable currency exchange impacts, partially offset by $6.6 million of unfavorable price impacts due to customer and product mix. Refining Solutions adjusted EBITDA decreased 11%, or $27.0 million, to $212.0 million for the year ended December 31, 2017 compared to the corresponding period of 2016, primarily due to unfavorable price and mix impacts, higher costs and a $10.3 million of negative impact from hurricane Harvey, partially offset by $2.5 million of favorable currency translation impacts.

All Other

All Other net sales for the year ended December 31, 2017 were $128.9 million, a decrease of $52.1 million compared to the year ended December 31, 2016. This decrease was primarily due to the impact of the sale of the minerals-based flame retardants and specialty chemicals business of $38.6 million, as well as unfavorable fine chemistry services pricing impacts due

Albemarle Corporation and Subsidiaries

to a contract formula change which did not impact earnings. All Other adjusted EBITDA was down 6%, or $0.9 million, for the year ended December 31, 2017 in comparison to the same period of 2016. The year ended December 31, 2016 included the impact of the sale of the minerals-based flame retardants and specialty chemicals business of $3.4 million and a $2.9 million gain in the fair value of our investment in private equity securities.

Corporate

Corporate adjusted EBITDA was a charge of $117.8 million for the year ended December 31, 2017, an increase of $32.0 million, compared to the year ended December 31, 2016, primarily due to increased compensation costs, professional fees and $13.5 million of unfavorable currency impacts.

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 for 2016 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 resulting from 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 period of 2015. 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 of 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 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 expenses, 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 expenses in 2015. Excluding the $57.6 million increase in SG&A expenses related to pension and OPEB plans, SG&A expenses 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 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%.

Albemarle Corporation and Subsidiaries

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 recognized upon the sale of land in Avonmouth, U.K., which was utilized by the phosphorus flame retardants business we exited in 2012.

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

Albemarle Corporation and Subsidiaries

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., resulting from higher sales volumes, partially offset by the sale of our ownership interest in Magnifin Magnesiaprodukte GmbH (which was included in the minerals-based flamed retardants business) in 2016.

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 of 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 JBC 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 Euro-based 1.875% Senior notes which have been 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

Albemarle Corporation and Subsidiaries

connection with the revaluation of our Euro-based 1.875% Senior notes and settlement of related foreign currency forward contracts, both of which have been designated as a hedge of our net investment in foreign operations.

Segment Information Overview. Summarized financial information concerning our reportable segments is shown in the following tables.

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 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 Business, Net” on page 40 for a description of these items.
(b)See “Acquisition and Integration Related Costs” on page 40 for a description of these items.
(c)Included amounts for the year ended December 31, 2016 recorded in:
▪Research and development expenses - $1.4 million related to the write-off of fixed assets.
▪Selling, general and administrative expenses - $0.9 million related to the net loss on the sales of properties.
▪Other (expenses) income, net - $2.4 million related to environmental charges related to a site formerly owned by Albemarle, 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 40 for a description of this gain.
(f)Refining Solutions included an impairment charge of approximately $2.0 million related to our unconsolidated investment in Fábrica Carioca de Catalisadores SA. Corporate included 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 Lithium sales volumes due to market demand, $70.6 million of favorable Lithium price impacts due primarily to price increases

Albemarle Corporation and Subsidiaries

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 corresponding period of 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%, compared to the corresponding period of 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 corresponding period of 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 JBC 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 corresponding period of 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 compared 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 the year ended December 31, 2016 as compared to 2015 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 the fine chemistry services business, 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.

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.

Albemarle Corporation and Subsidiaries

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 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. Our reporting units are either our operating business segments or one level below our operating business segments for which discrete financial information is available and for which operating results are regularly reviewed by the business management and the chief operating decision maker. 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”)

Albemarle Corporation and Subsidiaries

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, 2017 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 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 the majority of 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.

Resource Development Expenses

We incur costs in resource exploration, evaluation and development during the different phases of our resource development projects. Exploration costs incurred before obtaining legal rights to explore an area are generally expensed as incurred. After obtaining legal rights, exploration costs are expensed in areas where we have uncertainty about obtaining proven resources. In areas where we have substantial knowledge about the area and consider it probable to obtain commercially viable proven resources, exploration and evaluation costs can be capitalized.

If technical feasibility studies have been obtained, resource evaluation expenses are capitalized when the study demonstrates proven or probable resources for which future economic returns are expected, while costs for projects that are not considered viable are expensed. Development costs that are necessary to bring the property to commercial production or increase the capacity or useful life are capitalized. Costs to maintain the production capacity in a property under production are expensed as incurred.

Capitalized resource costs are depleted using the units-of-production method. Our resource development assets are evaluated for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.

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.
Albemarle Corporation and Subsidiaries

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 2017, 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 2017, 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, 2017 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, 2017, the weighted-average discount rate for the U.S. and foreign pension plans was decreased to 4.03% and 1.94%, respectively, from 4.43% and 2.00%, respectively, at December 31, 2016 to reflect market conditions as of the December 31, 2017 measurement date. The discount rate for the OPEB plans at December 31, 2017 and 2016 was 3.99% and 4.35%, 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 2017 and 2016, the weighted-average expected rate of return on U.S. pension plan assets was 6.89% and the weighted-average expected rate of return on foreign pension plan assets was 6.16% and 6.66%, respectively. Effective January 1, 2018, the weighted-average expected rate of return on U.S. and foreign pension plan assets is 6.89% and 5.52%, respectively. The weighted-average expected rate of return on plan assets for our OPEB plans was 7.00% during 2017 and 2016. There has been no change to the assumed rate of return on OPEB plan assets effective January 1, 2018.

In projecting the rate of compensation increase, we consider past experience in light of movements in inflation rates. At December 31, 2017 and 2016, the assumed weighted-average rate of compensation increase was 3.18% for our foreign pension plans.

In October 2016, the Society of Actuaries (“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. In October 2017, the SOA published an updated Mortality Improvement Scale, MP-2017. The updated improvement scale incorporates an additional year of mortality data (2015). We utilized the same base, SOA RP-2014 Adjusted to 2006 Total Dataset Mortality, but we revised our mortality assumption to incorporate the MP-2017 Mortality Improvement Scale for purposes of measuring our U.S. pension and OPEB obligations at December 31, 2017.

At December 31, 2017, 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.

Albemarle Corporation and Subsidiaries

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$(109,239)$4,130$132,139$(5,685)
Other postretirement benefits$(5,170)$286$6,186$(359)
Expected return on plan assets:
Pension*$(6,389)*$6,389
Other postretirement benefits*$(1)*$1
  • Not applicable.

Of the $660.7 million total pension and postretirement assets at December 31, 2017, $96.4 million, or approximately 15%, 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.

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 2011. Due to the statute of limitations, we also are no longer subject to U.S. state income tax audits prior to 2011.

With respect to jurisdictions outside the U.S., several audits are in process. We have audits ongoing for the years 2006 through 2015 related to Germany, Taiwan, Canada, Italy, India, and France, some of which are for 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

Albemarle Corporation and Subsidiaries

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 $1.6 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 a portion 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. The enactment of the TCJA during the fourth quarter of 2017 includes a one-time transition tax on earnings of certain foreign subsidiaries, and as a result, all previously unremitted earnings for which no U.S. deferred tax liability had been accrued are now subject to U.S. tax. Despite the U.S. taxation of these amounts, we intend to invest most or all of these earnings indefinitely outside the U.S. and do not provide for deferred income taxes on the unremitted earnings of these subsidiaries. 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. We will continue to evaluate our permanent investment assertion taking into consideration the TCJA. The accounting is expected to be completed within the measurement period, as allowed under Staff Accounting Bulletin (“SAB”) 118.

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.

Financial Condition and Liquidity

Overview

The principal uses of cash in our business generally have been capital investments and resource development costs, funding working capital, 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 $1.14 billion at December 31, 2017 as compared to $2.27 billion at December 31, 2016. Cash provided by operating activities was $304.0 million, $735.5 million and $360.8 million during the years ended December 31, 2017, 2016 and 2015, respectively.

The decrease in cash provided by operating activities in 2017 versus 2016 was primarily due to the 2017 payment of approximately $257 million of income taxes from the gain on sale of the Chemetall Surface Treatment business, that was recorded in income taxes payable in 2016. In addition, the decrease resulted from the build up of inventory in the Lithium and Advanced Materials reportable segment in 2017. This was partially offset by increased overall sales volumes and prices, lower acquisition and integration related costs and lower interest payments in 2017 as compared to 2016. The increase in cash provided by operating activities in 2016 versus 2015 was primarily due to the increase in income taxes payable from the gain on sale of the Chemetall Surface Treatment business, 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

Albemarle Corporation and Subsidiaries

and taxes, partially offset by an increase in accounts receivable from higher sales in certain regions with longer payment terms, as compared to 2015.

During 2017, cash on hand, cash provided by operations and net borrowings of $138.8 million funded $778.2 million of debt repayments, $317.7 million of capital expenditures for plant, machinery and equipment, a $250.0 million accelerated share repurchase program, dividends to shareholders of $140.6 million, and pension and postretirement contributions of $13.3 million. Also during 2017, our consolidated joint venture, JBC, paid dividends of approximately $102.5 million, which resulted in dividends to noncontrolling interests of $36.8 million. 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.

On December 14, 2017, we signed a definitive agreement to sell the polyolefin catalysts and components portion of our PCS business to W.R. Grace & Co. for proceeds of approximately $416 million in cash. The transaction includes Albemarle’s Product Development Center located in Baton Rouge, Louisiana, and operations at our Yeosu, South Korea site. The sale does not include the organometallics or curatives portion of the PCS business. The sale of the polyolefin catalysts business and components reflects our commitment to investing in the future growth of our high priority businesses and returning capital to shareholders. The sale is expected to close in the first quarter of 2018, subject to the satisfaction of customary closing conditions, including approvals from regulatory authorities. The assets and liabilities of this business are included in Assets held for sale and Liabilities held for sale, respectively, in the consolidated balance sheet as of December 31, 2017.

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 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 in 2016. We used the proceeds to significantly reduce leverage, including repaying the outstanding balance of the September 2015 Term Loan in full and approximately $153 million of Commercial Paper Notes in December 2016. In addition, during the first quarter of 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.

In 2016, we completed the sales of our metal sulfides business and our mineral-based flame retardants and specialty chemicals businesses for net proceeds of approximately $137 million and $187 million, respectively. The net proceeds from both sales were used to repay a portion of the outstanding balance under the September 2015 Term Loan Agreement.

Capital expenditures were $317.7 million, $196.7 million and $227.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, and were incurred mainly for plant, machinery and equipment. The increase in capital expenditures during the year ended December 31, 2017 primarily relates to the Lithium plant expansion projects in Chile. 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 $800 to $900 million in 2018 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 2017, we incurred $33.9 million of acquisition and integration related costs related to various significant projects, including the Jiangli New Materials acquisition, which contains unusual compensation related costs negotiated specifically as a result of this acquisition that are outside of the Company’s ordinary compensation arrangements. 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 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 was permitted to repurchase up to a maximum

Albemarle Corporation and Subsidiaries

of 15,000,000 shares, including those previously authorized but not yet repurchased. Under our existing Board authorized share repurchase program, the Company entered into an ASR agreement with a financial institution on March 1, 2017. Under the ASR agreement, in March 2017, the Company paid $250 million from available cash on hand and received and retired an initial delivery of 1,948,178 shares of our common stock. Under the terms of the ASR agreement, on June 16, 2017, the transaction was completed and we received a final settlement of 392,905 shares, calculated based on the daily Rule 10b-18 volume-weighted average prices of the Company’s common stock over the term of the ASR agreement, less an agreed discount. In total, we received and retired 2,341,083 shares under the ASR agreement, which reduced the Company’s weighted average shares outstanding for purposes of calculating basic and diluted earnings per share for the year ended December 31, 2017. As of December 31, 2017, there were 12,658,917 remaining shares available for repurchase under the Company’s authorized share repurchase program. There were no shares of our common stock repurchased during 2016 or 2015.

Net current assets decreased to approximately $1.28 billion at December 31, 2017 from $2.17 billion at December 31, 2016, with the decrease being largely due to the reduction in cash used to repay a portion of the senior notes and to fund the accelerated share repurchase program during the first quarter of 2017. 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.

On February 23, 2018, we increased our quarterly dividend rate to $0.335 per share, a 5% increase from the quarterly rate of $0.32 per share paid in 2017.

At December 31, 2017 and December 31, 2016, our cash and cash equivalents included $1.10 billion and $846.4 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, 2017, 2016 and 2015, we repatriated approximately $20.5 million, $53.7 million and $122.5 million of cash associated with earnings, respectively, as part of these foreign earnings cash repatriation activities. In January 2018, we repatriated approximately $600 million of cash associated with earnings that were previously asserted to be indefinitely reinvested to fund our investment program. During the year ended December 31, 2017, we recorded an income tax benefit of $9.7 million related to previously taxed foreign earnings that we expect to repatriate within the foreseeable future. These repatriations do not change our assertion on the remaining foreign earnings that are deemed indefinitely reinvested.

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.

Long-Term Debt

We currently 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

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

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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.

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 1.10% as of December 31, 2017. There were no borrowings outstanding under the February 2014 Credit Agreement as of December 31, 2017.

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 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. At December 31, 2017, we had $421.3 million of Commercial Paper Notes outstanding bearing a weighted-average interest rate of approximately 1.8% and a weighted-average maturity of 36 days. The Commercial Paper Notes are classified as Current portion of long-term debt in our consolidated balance sheets at December 31, 2017 and December 31, 2016.

The non-current portion of our long-term debt amounted to $1.42 billion at December 31, 2017, compared to $2.12 billion at December 31, 2016. The decrease is attributable to the repayment of a portion of the senior notes with the proceeds from the sale of the Chemetall Surface Treatment business. In addition, at December 31, 2017, we had the ability to borrow $578.7 million under our commercial paper program and the February 2014 Credit Agreement, and $250.1 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, 2017 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 $63.5 million at December 31, 2017. 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.

Albemarle Corporation and Subsidiaries

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, 2017 (in thousands):

20182019202020212022Thereafter
Long-term debt obligations(a)$422,012$213$180,513$467,546$—$779,480
Expected interest payments on long-term debt obligations(b)53,38353,38353,38345,47936,713454,926
Operating lease obligations (rental)27,57625,60924,18423,72221,47620,220
Take or pay / throughput agreements(c)53,60116,62414,44112,1437,78521,116
Letters of credit and guarantees40,3475,8301,6729751,07413,581
Transition tax on foreign earnings(d)34,33734,33734,33734,33734,337257,530
Capital projects159,24613489———
Total$790,502$136,130$308,619$584,202$101,385$1,546,853
(a)Amounts represent the expected principal payments of our long-term debt and do not include any fair value adjustments, premiums or discounts. Obligations in 2018 include our outstanding Commercial Paper Notes of $421.3 million with a weighted average maturity of 36 days.
(b)Interest on our fixed rate borrowings was calculated based on the stated rates of such borrowings. A weighted average interest rate of approximately 0.35% was used for our remaining long-term debt obligations.
(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.
(d)In December 2017, the TCJA was signed into law imposing a one-time transition tax on foreign earnings, payable over an eight-year period. The one-time transition tax imposed by the TCJA is based on our total post-1986 earnings and profits that we previously deferred from U.S. income taxes. The prospective release of additional guidance may require us to refine our calculations and adjust our estimates.

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 $13 million in 2018. We may choose to make additional pension contributions in excess of this amount. We made contributions of approximately $10.9 million to our domestic and foreign pension plans for continuing operations (both qualified and nonqualified) during the year ended December 31, 2017.

The liability related to uncertain tax positions, including interest and penalties, recorded in Other noncurrent liabilities totaled $24.4 million and $27.9 million at December 31, 2017 and 2016, respectively. Related assets for corresponding offsetting benefits recorded in Other assets totaled $14.6 million and $15.1 million at December 31, 2017 and 2016, 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

Albemarle Corporation and Subsidiaries

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.

Following receipt of information regarding potential improper payments being made by third party sales representatives of our Refining Solutions business, we promptly retained outside counsel and forensic accountants to investigate potential violations of the Company’s Code of Conduct, the FCPA, and other potentially applicable laws. Based on this internal investigation, we have voluntarily self-reported potential issues relating to the use of third party sales representatives in our Refining Solutions business to the U.S. DOJ and SEC, and intend to cooperate with the DOJ and SEC in their review of these matters. In connection with our internal investigation, we have implemented, and are continuing to implement, appropriate remedial measures.

At this time, we are unable to predict the duration, scope, result or related costs associated with any investigations by the DOJ or SEC. We also are unable to predict what, if any, action may be taken by the DOJ or SEC or what penalties or remedial actions they may seek. Any determination that our operations or activities are not in compliance with existing laws or regulations, however, could result in the imposition of fines, penalties, disgorgement, equitable relief, or other losses. We do not believe, however, that any fines, penalties, disgorgement, equitable relief or other losses would have a material adverse effect on our financial condition or liquidity.

We had cash and cash equivalents totaling $1.14 billion as of December 31, 2017, of which $1.10 billion is held by our foreign subsidiaries. This cash represents an important source of our liquidity and is invested in bank accounts or money market investments with no limitations on access. In January 2018, we repatriated approximately $600 million of cash associated with earnings that were previously asserted to be indefinitely reinvested to fund our investment program. All other 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 operating results.

Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a 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 $40.1 million, $34.4 million and $39.5 million in 2017, 2016 and 2015, 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, 2017 totaled approximately $39.8 million, an increase of $4.9 million from $34.9 million at December 31, 2016. 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, 2017, 2016 and 2015.

Albemarle Corporation and Subsidiaries

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 $28.1 million, $28.8 million and $18.6 million in 2017, 2016 and 2015, 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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