Albemarle 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

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FORM 10-Q

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For Quarterly Period Ended September 30, 2021

OR

For the transition period from to

Commission File Number 1-12658

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ALBEMARLE CORPORATION

(Exact name of registrant as specified in its charter)

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4250 Congress Street, Suite 900

Charlotte, North Carolina 28209

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code - (980) 299-5700

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Number of shares of common stock, $.01 par value, outstanding as of October 29, 2021: 116,976,318

ALBEMARLE CORPORATION

INDEX – FORM 10-Q

PART I. FINANCIAL INFORMATION

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In Thousands)

(Unaudited)

See accompanying Notes to the Condensed Consolidated Financial Statements.

ALBEMARLE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

(Unaudited)

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Forward-looking Statements

Some of the information presented in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “would,” “will” and variations of such words and similar expressions to identify such forward-looking statements.

These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. There can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially from the outlook expressed or implied in any forward-looking statement include, without limitation, information related to:

• changes in economic and business conditions;

• product development;

• future acquisition and divestiture transactions;

• expected benefits from proposed transactions;

• timing of active and proposed projects;

• changes in financial and operating performance of our major customers and industries and markets served by us;

• the timing of orders received from customers;

• the gain or loss of significant customers;

• competition from other manufacturers;

• changes in the demand for our products or the end-user markets in which our products are sold;

• limitations or prohibitions on the manufacture and sale of our products;

• availability of raw materials;

• increases in the cost of raw materials and energy, and our ability to pass through such increases 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 actions, 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 through 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;

• uncertainties as to the duration and impact of the novel coronavirus (“COVID-19”) pandemic; and

• the other factors detailed from time to time in the reports we file with the U.S. Securities and Exchange Commission (“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 condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

The following is a discussion and analysis of our results of operations for the three-month and nine-month periods ended September 30, 2021 and 2020. A discussion of our consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity.”

Overview

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that are designed to meet our customers’ needs across a diverse range of end markets. We believe our purpose is making the world safe and sustainable by powering the potential of people. The end markets we serve include energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals and crop protection. We believe that our commercial and geographic diversity, technical expertise, 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 to contribute to our sustainable revenue. For example, our Lithium business contributes to the growth of clean miles driven with electric miles and more efficient use of renewable energy through grid storage; Bromine Specialties enables the prevention of fires starting in electronic equipment, greater fuel efficiency from rubber tires and the reduction of emissions from coal fired power plants; and the Catalysts business creates efficiency of natural resources through more usable products from a single barrel of oil, enables safer, greener production of alkylates used to produce more environmentally-friendly fuels, and reduced emissions through cleaner transportation fuels. We believe our disciplined cost reduction efforts and ongoing productivity improvements, among other factors, position us well to take advantage of strengthening economic conditions as they occur, while softening the negative impact of the current challenging global economic environment.

Third Quarter 2021

During the third quarter of 2021:

• Our board of directors declared a quarterly dividend of $0.39 per share on July 20, 2021, which was paid on October 1, 2021 to shareholders of record at the close of business as of September 17, 2021.

• On September 30, 2021, we signed a definitive agreement to acquire all of the outstanding equity of Guangxi Tianyuan New Energy Materials Co., Ltd. (“Tianyuan”), for approximately $200 million in cash. Tianyuan's operations include a recently constructed lithium processing plant with a designed annual conversion capacity of up to 25,000 metric tons of lithium carbonate equivalent (“LCE”) per year.

• Our net sales for the quarter were $830.6 million, up 11% from net sales of $746.9 million in the third quarter of 2020.

• Diluted loss per share was $(3.36), which included an after tax loss of $504.5 million following an arbitration ruling related to a legal matter from a legacy Rockwood Holdings, Inc. (“Rockwood”) business sold to Huntsman International LLC (“Huntsman”) prior to Albemarle’s acquisition of Rockwood.

• Net cash provided by operations was $105.0 million in the third quarter of 2021

Outlook

The current global business environment presents a diverse set of opportunities and challenges in the mark

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There have been no significant changes in our interest rate risk, foreign currency exchange rate exposure, marketable securities price risk or raw material price risk from the information we provided in our Annual Report on Form 10-K for the year ended December 31, 2020, except as noted below.

During the first quarter of 2021, we repaid the remaining principal balance of our 1.875% Euro-denominated senior notes. Prior to this repayment, the carrying value these notes was designated as an effective hedge of our net investment in certain foreign subsidiaries where the Euro serves as the functional currency, and gains or losses on the revaluation of these senior notes to our reporting currency were recorded in accumulated other comprehensive loss. Upon repayment of these notes, this net investment hedge was discontinued. The balance of foreign exchange revaluation gains and losses associated with this discontinued net investment hedge will remain within accumulated other comprehensive loss until the hedged net investment is sold or liquidated.

We had variable interest rate borrowings of $5.4 million outstanding at September 30, 2021, bearing a weighted average interest rate of 0.36% and representing less than 1% of our total outstanding debt. A hypothetical 100 basis point increase in the interest rate applicable to these borrowings would change our annualized interest expense by approximately $0.1 million as of September 30, 2021. We may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs.

Our financial instruments, which are subject to foreign currency exchange risk, consist of foreign currency forward contracts with an aggregate notional value of $720.2 million and with a fair value representing a net asset position of $0.4 million at September 30, 2021. Fluctuations in the value of these contracts are generally offset by the value of the underlying exposures being hedged. We conducted a sensitivity analysis on the fair value of our foreign currency hedge portfolio assuming an instantaneous 10% change in select foreign currency exchange rates from their levels as of September 30, 2021, with all other variables held constant. A 10% appreciation of the U.S. Dollar against foreign currencies that we hedge would result in a decrease of approximately $26.7 million in the fair value of our foreign currency forward contracts. A 10% depreciation of the U.S. Dollar against these foreign currencies would result in an increase of approximately $27.0 million in the fair value of our foreign currency forward contracts. The sensitivity of the fair value of our foreign currency hedge portfolio represents changes in fair values estimated based on market conditions as of September 30, 2021, without reflecting the effects of underlying anticipated transactions. When those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on our earnings and cash flows in future periods.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the third quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.

On February 6, 2017, Huntsman International LLC (“Huntsman”), a subsidiary of Huntsman Corporation, filed a lawsuit in New York state court against Rockwood Holdings, Inc. (“Rockwood”), Rockwood Specialties, Inc., certain former executives of Rockwood and its subsidiaries—Seifollah Ghasemi, Thomas Riordan, Andrew Ross, and Michael Valente, and Albemarle. The lawsuit arises out of Huntsman’s acquisition of certain Rockwood subsidiaries in connection with a stock purchase agreement (the “SPA”), dated September 17, 2013. Before that transaction closed on October 1, 2014, Albemarle began discussions with Rockwood to purchase all outstanding equity of Rockwood and did so in a transaction that closed on January 12, 2015. Huntsman’s complaint asserted that certain technology that Rockwood had developed for a production facility in Augusta, Georgia, and which was among the assets that Huntsman acquired pursuant to the SPA, did not work, and that Rockwood and the defendant executives had intentionally misled Huntsman about that technology in connection with the Huntsman-Rockwood transaction. The complaint asserted claims for, among other things, fraud, negligent misrepresentation, and breach of the SPA, and sought certain costs for completing construction of the production facility.

On March 10, 2017, Albemarle moved in New York state court to compel arbitration, which was granted on January 8, 2018 (although Huntsman unsuccessfully appealed that decision). Huntsman’s arbitration demand asserted claims substantially similar to those asserted in its state court complaint, and sought various forms of legal remedies, including cost overruns, compensatory damages, expectation damages, punitive damages, and restitution. After a trial, the arbitration panel issued an award on October 28, 2021, awarding approximately $600 million (including interest) to be paid by Albemarle to Huntsman, in addition to the possibility of attorney’s fees, costs and expenses. Albemarle continues to assess its legal rights and options. Albemarle and Huntsman have initiated discussions regarding a resolution of the matter.

Based on our review of the decision by the AAA arbitration panel, Albemarle has decided to view the decision as representing the best estimate available of the outcome of this arbitration. As a result, the consolidated statements of income for the three and nine months ended September 30, 2021, includes a loss of $657.4 million ($504.5 million net of income tax), inclusive of estimated possible legal fees incurred by Huntsman and other related obligations, to reflect the increase in liabilities for this legal matter.

Additional information with respect to this Item 1 is contained in Note 10 to the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. The risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 describe some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of

operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

On November 3, 2021, we entered into a letter agreement with Raphael Crawford (the “Letter Agreement”) with respect to his compensation as President of our Catalysts Global Business Unit. The terms of the Letter Agreement were approved by the Executive Compensation Committee, based in part upon consultation with Pearl Meyer, which serves as independent compensation consultants to the Executive Compensation Committee.

The Letter Agreement provides Mr. Crawford with an enhanced compensation opportunity in exchange for his support of our strategic review of our Catalysts segment if such review results in our divestiture of the Catalysts segment.

Under the terms of the Letter Agreement, we will pay Mr. Crawford (a) an annual incentive bonus under our annual incentive plan for 2021 (“2021 AIP Bonus”) and, (b) if the closing date of our divestiture of the Catalysts segment (the “Closing Date”) occurs after January 1, 2022, an amount based on his target annual incentive bonus under our annual incentive plan for 2022 that will be established for the Catalysts segment (“2022 Catalysts Bonus”), subject to certain adjustments. The 2021 AIP Bonus shall be paid no later than March 15, 2022 (the “AIP Bonus Date”) and the 2022 Catalysts Bonus shall be paid no later than thirty days following the Closing Date. In addition, we will pay Mr. Crawford a one-time, cash payment equivalent to 5% of his annual salary as in effect as of the date of the Letter Agreement (the “Retention Payment”) if he is employed on the Closing Date and remains employed until the date three months following the Closing Date, or, if earlier, the date he is terminated without cause (the date three months following the Closing Date or of such termination without cause, as applicable, the “Retention Payment Date”). Mr. Crawford’s eligibility to receive the 2021 AIP Bonus, the 2022 Catalysts Bonus, and the Retention Payment are subject to his continued employment through the AIP Bonus Date, the Closing Date, and the Retention Payment Date, respectively.

The Letter Agreement also provides for the accelerated vesting of certain outstanding equity incentive awards (the “LTI Award(s)”) previously granted to Mr. Crawford under our 2017 Incentive Plan. Pursuant to the Letter Agreement: (a) a portion of Mr. Crawford’s outstanding restricted stock units will vest on the Closing Date, and Mr. Crawford will be entitled to receive one share of common stock for each remaining restricted stock unit on the date or dates on which such restricted stock units would have vested under the applicable LTI Award; (b) a portion of Mr. Crawford’s outstanding stock options will vest on the Closing Date, and the remaining options shall vest and become exercisable on the date or dates such options would have vested under the terms of the applicable LTI Award; (c) outstanding performance units payable under the February 2018 Performance Unit LTI Award will be fully vested and paid on the earlier of January 1, 2022 or the Closing Date; (d) with respect to outstanding performance units payable under the February 2019 Performance Unit LTI Award, 50% of such performance units will be fully vested and paid on the date on which our compensation committee determines the number of units earned under such award, and 50% of such units will be fully vested and paid on the earlier of the Closing Date and January 1, 2023; and (e) 50% of all other outstanding performance unit LTI Awards shall vest and be paid on the date or dates on which such performance units would have vested under the applicable LTI Award, and 50% of such units shall vest and be paid on the following January 1. The accelerated vesting and other terms of such awards under the Letter Agreement are subject to, where applicable, Mr. Crawford’s employment not having been terminated by us or the purchaser for Cause (as defined in the Letter Agreement) or by Mr. Crawford’s voluntarily resignation prior to 12 months following the Closing Date.

The Letter Agreement contains a release of claims and customary covenants related to confidentiality, non‑competition, and non-solicitation of customers, business partners, and employees.

The foregoing description of the Letter Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Letter Agreement, which is included as Exhibit 10.1 to this report and is incorporated herein by reference.

(a) Exhibits

Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements of Income for the nine months ended September 30, 2021 and 2020, (ii) the Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2021 and 2020, (iii) the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, (iv) the Consolidated Statements of Changes in Equity for the nine months ended September 30, 2021 and 2020, (v) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 and (vi) the Notes to the Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.