ALBEMARLE CORPORATION Forward-looking Statements Some of the information presented in this Quarterly Report on Form 10-Q, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "would," "will" and variations of such words and similar expressions to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. There can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially from the outlook expressed or implied in any forward-looking statement include, without limitation, information related to: • changes in economic and business conditions;
• 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 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.
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The following is a discussion and analysis of our results of operations for the three-month periods endedMarch 31, 2020 and 2019. 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. 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 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. First Quarter 2020 During the first quarter of 2020: • Our board of directors declared a quarterly dividend of$0.385 per share onFebruary 28, 2020 , which was paid onApril 1, 2020 to shareholders of record at the close of business as ofMarch 13, 2020 .
• In
the Board of Directors that he will retire from his roles as an officer and
director of
2020, we announced that
President and Chief Executive Officer, effective immediately.
will stay on through
leadership transition. In addition,
the Board of Directors through the annual meeting of shareholders in 2021,
as he was re-elected at our 2020 annual meeting of shareholders on
2020.
• Our net sales for the quarter were
of
• Diluted earnings per share were
results of $1.26 per diluted share.
• Net cash provided by operations was $155.1 million , an increase of 182%
from first quarter 2019.
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 the impact on our business of changing global conditions, such as slow
and uneven global growth, currency exchange volatility, crude oil price
fluctuation, a dynamic pricing environment, an ever-changing landscape in
electronics, the continuous need for cutting edge catalysts and technology by
our refinery customers and increasingly stringent environmental standards.
Amidst these dynamics, we believe our business fundamentals are sound and that
we are strategically well-positioned as we remain focused on increasing sales
volumes, optimizing and improving the value of our portfolio primarily through
pricing and product development, managing costs and delivering value to our
customers and shareholders. We believe that our businesses remain
well-positioned to capitalize on new business opportunities and long-term trends
driving growth within our end markets and to respond quickly to changes in
economic conditions in these markets.
Currently, COVID-19 is having an impact on overall global economic conditions.
While we have not seen a material financial impact to date, the ultimate impact
on our business will depend on the length and severity of the outbreak
throughout
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the world. All of our sites are operating at normal capacity while we continue to comply with all government and health agency recommendations and requirements, as well as protecting the safety of our employees and communities. We believe we have sufficient inventory to continue to produce at current levels, however, government mandated shutdowns could impact our ability to acquire additional materials and disrupt our customers' purchases. At this time we cannot predict the expected overall financial impact of COVID-19 on our business, but we are planning for various economic scenarios to make efforts to protect the safety of our employees and the health of our business. Lithium: We expect results to decline year-over-year during 2020 in Lithium, due mainly to pricing pressure in certain markets, partially offset by productivity enhancements across our business. There is no new capacity coming online during 2020 to drive significant additional volume. We have not experienced a material impact from COVID-19 to date, however, our position in the automotive OEM supply chain may delay the overall impact to Lithium. While our plants inChina temporarily operated at reduced rates during the first quarter due to operating restrictions, both plants are now back at normal capacity. We are continuing to monitor the Lithium impact for the remainder of the year as global electric vehicle production has slowed. In addition, following the acquisition of 60% interest in the Wodgina spodumene mine, we have made the decision to idle production of spodumene until demand supports bringing the mine back into production. On a longer-term basis, we believe that demand for lithium will continue to grow as new lithium applications advance and the use of plug-in hybrid electric vehicles and full battery electric vehicles increases. This demand for lithium is supported by a favorable backdrop of steadily declining lithium ion battery costs, increasing battery performance and favorable global public policy toward e-mobility/renewable energy usage. Our outlook is also bolstered by long-term supply agreements with key strategic customers, reflecting our standing as a preferred global lithium partner, highlighted by our scale, access to geographically diverse, low-cost resources and long-term track record of reliability of supply and operating execution. Bromine Specialties: We expect both net sales and profitability to be down in 2020, driven by logistics challenges and lower overall average selling prices as global bromine supply and demand comes into balance, as well as lower demand from recent shutdowns related to COVID-19. Our current demand continues to be strong and we have not experienced a material impact from COVID-19 to date, however, we are likely to see the effect in the second half of 2020 due to our position in the supply chain as our global customer and suppliers experience disruptions. 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. Our long-term drilling outlook is uncertain at this time and will follow a long term trajectory in line with oil prices. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. The combination of our solid, long-term business fundamentals, strong cost position, product innovations and effective management of raw material costs will enable us to manage our business through end-market challenges and to capitalize on opportunities that are expected with favorable market trends in select end markets. Catalysts: We expect both net sales and profitability to be down in 2020, driven by logistics challenges and significantly lower demand due to stay at home orders and travel restrictions resulting from COVID-19. The travel restrictions impacted FCC in the first quarter due to reduced transportation fuel demand inAsia and we expect similar downturns in demand during the remainder of the year, as the rest of the world has implemented similar restrictions. As these restrictions are lifted, we expect fuel demand to recover, however, at this time we are unable to predict the timing of these changes. To date, we have not seen a material impact to HPC. However, as customers focus on reducing capital spending in 2020 we are likely to see a negative impact in the second half of 2020 if refiners are able to defer change outs. We will continue to monitor the situation as we expect our global customer and suppliers to continue to experience disruptions resulting from the impact of COVID-19. On a longer-term basis, we believe increased global demand for transportation fuels, new refinery start-ups and ongoing adoption of cleaner fuels will be the primary drivers of growth in our Catalysts business. We believe delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry. We 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 inNorth America tight oil, and those in theMiddle East andAsia seeking to use heavier feedstock while pushing for higher propylene yields. Longer-term, we believe that the global crude supply will get heavier and more sour, a trend that bodes well for our catalysts portfolio. With superior technology and production capacities, and expected growth in end market demand, we believe that Catalysts remains well-positioned for the future. In PCS, we expect growth on a longer-term basis in our organometallic business due to growing global demand for plastics driven by rising standards of living and infrastructure spending. As previously announced, we have begun to pursue opportunities to divest PCS, however, travel restrictions from COVID-19 have temporarily delayed due diligence process. 27
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All Other: The fine chemistry services business is reported outside the Company's reportable segments as it does not fit in the Company's core businesses. We expect the near future prospects for the fine chemistry services business to continue to be impacted by the timing of customer orders in a strong pharmaceutical and agriculture contract manufacturing environment. As previously announced, we have begun to pursue opportunities to divest our fine chemistry services business, however, travel restrictions from COVID-19 have temporarily delayed due diligence process. Corporate: In the first quarter of 2020, we increased our quarterly dividend rate to$0.385 per share. We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2020 to continue to vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in theU.S. , including theU.S. Tax Cuts and Jobs Act ("TCJA"), and other tax jurisdictions. We remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint. Additional information regarding our products, markets and financial performance is provided at our website, www.albemarle.com. Our website is not a part of this document nor is it incorporated herein by reference.
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.
First Quarter 2020 Compared to First Quarter 2019
Selected Financial Data (Unaudited)
Net Sales In thousands Q1 2020 Q1 2019 $ Change % Change Net sales$ 738,845 $ 832,064 $ (93,219 ) (11 )% ?$79.9 million of lower sales volume from each of our reportable segments ?$13.6 million of unfavorable pricing driven by Lithium Gross Profit In thousands Q1 2020 Q1 2019 $ Change % Change Gross profit$ 242,018 $ 283,486 $ (41,468 ) (15 )% Gross profit margin 32.8 % 34.1 % ? Lower sales volume from each of our reportable segments and unfavorable pricing impacts driven by Lithium ? Lower raw material costs in our Catalysts segment from a reduction in metal prices ? Unfavorable currency exchange impacts resulting from the strongerU.S. Dollar against various currencies Selling, General and Administrative Expenses In thousands Q1 2020 Q1 2019 $ Change % Change Selling, general and administrative expenses$ 101,877 $ 113,355 $ (11,478 ) (10 )% Percentage of Net sales 13.8 % 13.6 % ? Lower professional fees and other administrative costs resulting from our cost savings initiative ?$2.3 million of lower acquisition and integration related costs Research and Development Expenses In thousands Q1 2020 Q1 2019 $ Change %
Change
Research and development expenses
7 % Percentage of Net sales 2.2 % 1.8 % ?
Increased research and development spend in Bromine Specialties
Interest and Financing Expenses
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In thousands Q1 2020 Q1 2019 $ Change % Change Interest and financing expenses$ (16,885 ) $ (12,586 ) $ (4,299 ) 34 % ? Increased debt balance in 2020, primarily related to the funding of theWodgina Project acquisition ? The increase was partially offset by higher capitalized interest from continued capital expenditure spend in 2020 Other Income, Net In thousands Q1 2020 Q1 2019 $ Change % Change Other income, net $ 8,314$ 11,291 $ (2,977 ) (26 )% ?$11.1 million gain related to the sale of land inPasadena, Texas in 2019 ?$2.3 million increase in losses related to the adjustment of indemnifications related to previously divested businesses ?$11.4 million increase in foreign exchange gains Income Tax Expense In thousands Q1 2020 Q1 2019 $ Change % Change Income tax expense$ 18,442 $ 37,514 $ (19,072 ) (51 )% Effective income tax rate 16.0 % 24.4 % ?
Change in geographic mix of earnings, mainly attributable to our share of the income of our
Equity in Net Income of Unconsolidated Investments In thousands Q1 2020 Q1 2019 $ Change % Change Equity in net income of unconsolidated investments$ 26,604 $ 35,181 $ (8,577 ) (24 )% ? Lower earnings from our Lithium segment joint venture,Windfield Holdings Pty Ltd , primarily driven by foreign currency losses of$12.6 million Net Income Attributable to Noncontrolling Interests In thousands Q1 2020 Q1 2019 $ Change % Change Net income attributable to noncontrolling interests$ (16,431 ) $ (17,957 ) $ 1,526 (8 )% ?
Decrease in consolidated income related to our JBC joint venture from lower sales volume
Net Income Attributable toAlbemarle Corporation In thousands Q1 2020 Q1 2019 $ Change % Change Net income attributable toAlbemarle Corporation $ 107,204 $ 133,569 $ (26,365 ) (20 )% Percentage of Net sales 14.5 % 16.1 % Basic earnings per share$ 1.01 $ 1.26 $ (0.25 ) (20 )% Diluted earnings per share$ 1.01 $ 1.26 $ (0.25 ) (20 )% ? No material impact to results from COVID-19 in the first quarter of 2020 ? Decrease primarily due to decreased sales volume in each of our reportable segments and unfavorable price impacts in Lithium ? Lower raw material and royalty costs from lower sales volume ? Lower professional fees and other administrative costs resulting from our cost savings initiative 29
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Other Comprehensive Loss, Net of Tax In thousands Q1 2020 Q1 2019 $ Change % Change Other comprehensive loss, net of tax$ (130,708 ) $ (6,903 ) $ (123,805 ) 1,793 % ?
Foreign currency translation
$ (71,131 ) 655 % ? 2020 included unfavorable movements in the Euro of approximately$55 million , the Brazilian Real of approximately$16 million , the Chilean Peso of approximately$5 million and a net unfavorable variance in various other currencies totaling approximately$6 million ? 2019 included unfavorable movements in the Euro of approximately$14 million and the Brazilian Real of approximately$2 million , partially offset by a net favorable variance in various other currencies totaling approximately$5 million ? Cash flow hedge$ (51,460 ) $ -$ (51,460 ) ? Net investment hedge$ 2,081 $ 3,304 $ (1,223 ) (37 )% Segment Information Overview. We have identified three reportable segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by the Company's chief operating decision maker to evaluate performance and make resource allocation decisions. Our reportable business segments consist of: (1) Lithium, (2) Bromine Specialties and (3) Catalysts. Summarized financial information concerning our reportable segments is shown in the following tables. The "All Other" category includes only the fine chemistry services business, that does not fit into any of our core businesses. The Corporate category is not considered to be a segment and includes corporate-related items not allocated to the operating segments. Pension and OPEB service cost (which represents the benefits earned by active employees during the period) and amortization of prior service cost or benefit are allocated to the reportable segments, All Other, and Corporate, whereas the remaining components of pension and OPEB benefits cost or credit ("Non-operating pension and OPEB items") are included in Corporate. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs. The Company's chief operating decision maker uses adjusted EBITDA (as defined below) to assess the ongoing performance of the Company's business segments and to allocate resources. The Company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, as adjusted on a consistent basis for certain non-recurring or unusual items in a balanced manner and on a segment basis. These non-recurring or unusual items may include acquisition and integration related costs, gains or losses on sales of businesses, restructuring charges, facility divestiture charges, non-operating pension and OPEB items and other significant non-recurring items. In addition, management uses adjusted EBITDA for business planning purposes and as a significant component in the calculation of performance-based compensation for management and other employees. 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 attributable toAlbemarle Corporation , the most directly comparable financial measure calculated and reported in accordance withU.S. GAAP, or any other financial measure reported in accordance withU.S. GAAP. 30
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Three Months Ended March 31, Percentage Change
2020 % 2019 % 2020 vs 2019
(In thousands, except percentages)
Net sales:
Lithium $ 236,818 32.1 % $ 291,886 35.1 % (19 )%
Bromine Specialties 231,592 31.3 % 249,052 29.9 % (7 )%
Catalysts 207,207 28.0 % 251,648 30.2 % (18 )%
All Other 63,228 8.6 % 39,478 4.8 % 60 %
Total net sales $ 738,845 100.0 % $ 832,064 100.0 % (11 )%
Adjusted EBITDA:
Lithium $ 78,637 40.0 % $ 115,616 51.2 % (32 )%
Bromine Specialties 83,262 42.4 % 78,597 34.8 % 6 %
Catalysts 47,470 24.2 % 60,071 26.6 % (21 )%
All Other 22,824 11.6 % 7,243 3.2 % 215 %
Corporate (35,828 ) (18.2 )% (35,660 ) (15.8 )% - %
Total adjusted EBITDA $ 196,365 100.0 % $ 225,867 100.0 % (13 )%
See below for a reconciliation of adjusted EBITDA, the non-GAAP financial
measure, from Net income attributable to
Bromine Reportable
Lithium Specialties Catalysts Segments Total All Other Corporate Consolidated Total
Three months ended March
31, 2020
Net income (loss)
attributable to Albemarle
Corporation $ 53,240 $ 71,665 $ 34,892 $ 159,797 $ 20,846 $ (73,439 ) $ 107,204
Depreciation and
amortization 25,397 11,597 12,578 49,572 1,978 2,144 53,694
Restructuring and other(a) - - - - - 1,847 1,847
Acquisition and integration
related costs(b) - - - - - 2,951 2,951
Interest and financing
expenses - - - - - 16,885 16,885
Income tax expense - - - - - 18,442 18,442
Non-operating pension and
OPEB items - - - - - (2,908 ) (2,908 )
Other(c) - - - - - (1,750 ) (1,750 )
Adjusted EBITDA $ 78,637 $ 83,262 $ 47,470 $ 209,369 $ 22,824 $ (35,828 ) $ 196,365
Three months ended March
31, 2019
Net income (loss)
attributable to Albemarle
Corporation $ 93,169 $ 67,480 $ 47,859 $ 208,508 $ 5,206 $ (80,145 ) $ 133,569
Depreciation and
amortization 22,092 11,117 12,212 45,421 2,037 1,825 49,283
Acquisition and integration
related costs(b) - - - - - 5,285 5,285
Gain on sale of property(d) - - - - - (11,079 ) (11,079 )
Interest and financing
expenses - - - - - 12,586 12,586
Income tax expense - - - - - 37,514 37,514
Non-operating pension and
OPEB items - - - - - (583 ) (583 )
Other(e) 355 - - 355 - (1,063 ) (708 )
Adjusted EBITDA $ 115,616 $ 78,597 $ 60,071 $ 254,284 $ 7,243 $ (35,660 ) $ 225,867
(a) Severance payments as part of a business reorganization plan,
recorded in Cost of goods sold,
administrative expenses and a
attributable to noncontrolling interest for the portion of severance expense
allocated to our Jordanian joint venture partner.
(b) Included acquisition and integration related costs relating to various
significant projects. For the three-month periods ended
2019,
administrative expenses, respectively.
(c) Included amounts for the three months ended
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? Other income, net -
legal matter related to a business sold, partially offset by a
million loss resulting from the adjustment of indemnifications related to
previously disposed businesses.
(d) Gain recorded in Other income, net related to the sale of land in
(e) Included amounts for the three months ended
? Cost of goods sold -
compensation related costs in
arrangements.
? Selling, general and administrative expenses - Severance payments as part
of a business reorganization plan of $0.5 million .
? Other income, net - $1.6 million of a net gain resulting from the
adjustment of indemnification and other liabilities related to previously
disposed businesses.
Lithium
In thousands Q1 2020 Q1 2019 $ Change % Change
Net sales $ 236,818 $ 291,886 $ (55,068 ) (19 )%
?
$26.5 million in lower sales volume, primarily in battery- and tech-grade lithium carbonate due
to higher inventory levels at certain customers and current economic conditions
?
$25.5 million of unfavorable pricing impacts, primarily in battery- and tech-grade carbonate and
hydroxide due to lower contract pricing reflecting 2020 price adjustments agreed to with
customers
?
$3.0 million of unfavorable currency translation resulting from the stronger U.S. Dollar against
various currencies
Adjusted EBITDA $ 78,637 $ 115,616 $ (36,979 ) (32 )%
?
Unfavorable pricing impacts and lower sales volume
?
Increase in certain material costs
?
Partially offset by various cost savings initiatives
?
$3.0 million of favorable currency translation resulting from a weaker Chilean Peso
Bromine Specialties
In thousands Q1 2020 Q1 2019 $ Change % Change
Net sales $ 231,592 $ 249,052 $ (17,460 ) (7 )%
?
$28.8 million in lower sales volume related to logistics challenges
?
$10.2 million in favorable pricing impacts in each bromine division
?
$1.4 million of favorable currency translation resulting from the weaker U.S. Dollar against
various currencies
Adjusted EBITDA $ 83,262 $ 78,597 $ 4,665 6 %
?
Favorable pricing impacts and product mix, partially offset by lower sales volume
?
Lower production and raw material costs
Catalysts
In thousands Q1 2020 Q1 2019 $ Change % Change
Net sales $ 207,207 $ 251,648 $ (44,441 ) (18 )%
?
$48.6 million of lower sales volume, primarily from lower fuel demand due to stay at home orders
and travel restrictions in Asia related to COVID-19 pandemic
?
$2.1 million of favorable pricing impacts, primarily in PCS and FCC
?
$2.0 million of favorable currency translation resulting from the weaker U.S. Dollar against
various currencies
Adjusted EBITDA $ 47,470 $ 60,071 $ (12,601 ) (21 )%
?
Lower sales volume resulting from lower fuel demand
?
Lower raw material costs from a reduction in metal prices
?
Favorable pricing impacts and product mix
All Other
In thousands Q1 2020 Q1 2019 $ Change % Change
Net sales $ 63,228 $ 39,478 $ 23,750 60 %
?
Higher sales volume in our fine chemistry services business
Adjusted EBITDA $ 22,824 $ 7,243 $ 15,581 215 %
?
Higher sales volume in our fine chemistry services business
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Table of Contents Corporate In thousands Q1 2020 Q1 2019 $ Change % Change Adjusted EBITDA$ (35,828 ) $ (35,660 ) $ (168 ) - % ?
Financial Condition and Liquidity Overview The principal uses of cash in our business generally have been capital investments and resource development costs, funding working capital and service of debt. We also make contributions to our defined benefit pension plans, pay dividends to our shareholders and 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 borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations, fund capital expenditures and other investing activities, fund pension contributions and pay dividends for the foreseeable future. Cash Flow During the first three months of 2020, cash on hand, cash provided by operations and a$250 million draw on our revolving credit facility funded$214.5 million of capital expenditures for plant, machinery and equipment, the repayment of approximately$152 million of short-term commercial paper notes and dividends to shareholders of$39.0 million . In addition, during the first quarter of 2020, we paid$22.6 million of agreed upon purchase price adjustments to Mineral Resources Limited as part of the acquisition of the Wodgina spodumene mine completed in 2019. Our operations provided$155.1 million of cash flows during the first three months of 2020, as compared to$54.9 million for the first three months of 2019, with the increase primarily arising from a working capital inflow, compared to an outflow in 2018. This was partially offset by decreased cash earnings from Lithium and Catalysts, and lower dividends received from unconsolidated investments. Our inflow from working capital changes in 2020 of$17.7 million was primarily due to the timing on collection of receivables and payments of accounts payable, as well as lower cash taxes paid, partially offset by increased inventory balances in Lithium and Catalysts due to the build-up of inventory for forecasted sales during the remainder of 2020. Overall, our cash and cash equivalents decreased by$59.9 million to$553.2 million atMarch 31, 2020 from$613.1 million atDecember 31, 2019 . Capital expenditures for the three-month period endedMarch 31, 2020 of$214.5 million were associated with plant, machinery and equipment. Our capital expenditure spending for 2020 is committed to Lithium growth and capacity increases, primarily inAustralia andChile , as well as productivity and continuity of operations projects in all segments. We forecast our 2020 capital expenditures to be approximately$850 to$950 million , reflecting anticipated delays in certain capital expenditure projects, including the construction of our Kemerton,Australia and La Negra,Chile plants, in order to maintain financial flexibility. Net current assets were$962.3 million and$816.1 million atMarch 31, 2020 andDecember 31, 2019 , respectively. The increase is primarily due to the repayment of short-term commercial paper notes outstanding using a$250 million draw on our revolving credit facility, partially offset by the use of cash for capital expenditures. Additional changes in the components of net current assets are primarily due to the timing of the sale of goods and other ordinary transactions leading up to the balance sheet dates. The additional changes are not the result of any policy changes by the Company, and do not reflect any change in either the quality of our net current assets or our expectation of success in converting net working capital to cash in the ordinary course of business. OnFebruary 28, 2020 , we increased our quarterly dividend rate to$0.385 per share, a 5% increase from the quarterly rate of$0.3675 per share paid in 2019. AtMarch 31, 2020 andDecember 31, 2019 , our cash and cash equivalents included$429.6 million and$565.6 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 theU.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 theU.S. for normal operating needs through intercompany dividends, but only from subsidiaries whose earnings we have not asserted to be 33
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indefinitely reinvested or whose earnings qualify as "previously taxed income"
as defined by the Internal Revenue Code. There were no cash repatriations during
the first three months of 2019 and 2020.
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 notes outstanding:
Principal (in Interest Payment
Issue Month/Year millions) Interest Rate Dates Maturity Date
November 2019 €500.0 1.125% November 25 November 25, 2025
November 2019 €500.0 1.625% November 25 November 25, 2028
May 15 and November
November 2019(a) $300.0 3.45% 15 November 15, 2029
February 15, May 15,
August 15 and
November 2019(b) $200.0 Floating Rate November 15 November 15, 2022
December 2014(a) €393.0 1.875% December 8 December 8, 2021
November 2014(a) $425.0 4.15% June 1 and December 1 December 1, 2024
November 2014(a) $350.0 5.45% June 1 and December 1 December 1, 2044
(a) Denotes senior notes.
(b) Borrowings bear interest at a floating rate based on the 3-month LIBOR plus
105 basis points. The applicable floating interest rate for the current
interest period is 2.74%, with the interest rate reset on each interest
payment date.
Our senior notes and the floating rate note are senior unsecured obligations and
rank equally with all our other senior unsecured indebtedness from time to time
outstanding. The notes are effectively subordinated to 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 of these
notes 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 these notes to
be redeemed, or (ii) the sum of the present values of the remaining scheduled
payments of principal and interest thereon (exclusive of interest accrued to the
date of redemption) discounted to the redemption date on a semi-annual basis
using the comparable government rate (as defined in the indentures governing
these notes) plus between 25 and 40 basis points, depending on the 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. These notes are subject to typical events
of default, including bankruptcy and insolvency events, nonpayment and the
acceleration of certain subsidiary indebtedness of $40 million or more caused by
a nonpayment default.
Our Euro notes issued in 2019 are unsecured and unsubordinated obligations and
rank equally in right of payment to all our other unsecured senior obligations.
As is customary for such long-term debt instruments, each of these notes
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 notes to be redeemed and
(ii) the sum of the present values of the remaining scheduled payments of
principal thereof and interest thereon (exclusive of interest accrued to, but
excluding, the date of redemption) discounted to the redemption date on an
annual basis using the bond rate (as defined in the indentures governing these
notes) plus between 25 and 35 basis points, depending on the note, plus, in each
case, accrued and unpaid interest on the principal amount being redeemed to, but
excluding, the date of redemption. Holders may require us to purchase such notes
at 101% upon a change of control triggering event, as defined in the indentures.
These notes are subject to typical events of default, including bankruptcy and
insolvency events, nonpayment and the acceleration of certain subsidiary
indebtedness exceeding $100 million caused by a nonpayment default.
Our revolving, unsecured credit agreement dated as of June 21, 2018 , as amended
on August 14, 2019 (the "2018 Credit Agreement"), currently provides for
borrowings of up to $1.0 billion and matures on August 9, 2024 . Borrowings under
the 2018 Credit Agreement bear interest at variable rates based on an average
LIBOR for deposits in the relevant currency plus an applicable margin which
ranges from 0.910% to 1.500%, depending on the Company's credit rating from
Standard & Poor's Ratings Services LLC ("S&P"), Moody's Investors Services, Inc.
("Moody's") and Fitch Ratings, Inc. ("Fitch"). The applicable
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margin on the facility was 1.125% as ofMarch 31, 2020 . There were$250.0 million in outstanding borrowings under the 2018 Credit Agreement as ofMarch 31, 2020 . OnAugust 14, 2019 , the Company entered into a$1.2 billion unsecured credit facility (the "2019 Credit Facility") with several banks and other financial institutions. The lenders' commitment to provide loans under the 2019 Credit Facility terminates onAugust 11, 2020 , with each such loan maturing one year after the funding of such loan. The Company can request that the maturity date of loans be extended for an additional period of up to four additional years, but any such extension is subject to the approval of the lenders. Borrowings under the 2019 Credit Facility bear interest at variable rates based on an average LIBOR for deposits in the relevant currency plus an applicable margin which ranges from 0.875% to 1.625%, depending on the Company's credit rating from S&P, Moody's and Fitch. The applicable margin on the credit facility was 1.125% as ofMarch 31, 2020 . InOctober 2019 , we borrowed$1.0 billion under this credit facility to fund the cash portion of theOctober 31, 2019 acquisition of a 60% interest inMRL's Wodgina Project and for general corporate purposes, and such amount was repaid in full inNovember 2019 using a portion of the proceeds received from the notes issued in 2019. Following the repayment of the amounts borrowed, the Company had$200 million remaining to borrow under this credit facility. There were no borrowings outstanding under the 2019 Credit Facility as ofMarch 31, 2020 . InApril 2020 , the Company borrowed the remaining$200.0 million under this credit facility to be used for general corporate purposes. Borrowings under the 2019 Credit Facility and 2018 Credit Agreement (together "the Credit Agreements") are conditioned upon satisfaction of certain conditions precedent, including the absence of defaults. The Company is subject to one financial covenant, as well as customary affirmative and negative covenants. The financial covenant initially required that the Company's consolidated funded debt to consolidated EBITDA ratio (as such terms are defined in the Credit Agreements) to be less than or equal to 3.50:1, subject to adjustments in accordance with the terms of the Credit Agreements relating to a consummation of an acquisition where the consideration includes cash proceeds from issuance of funded debt in excess of$500 million . As a result of the uncertainty of the overall financial impact of the COVID-19 pandemic, the Company amended the Credit Agreements onMay 11, 2020 to modify its financial covenant based on the Company's current expectations. The amendment effects changes to certain provisions of the Credit Agreements, including: (a) conversion of the consolidated funded debt to consolidated EBITDA ratio to a consolidated net funded debt to consolidated EBITDA ratio; (b) carving-out third party sales of accounts receivables from the Securitization Transaction definition; (c) setting the consolidated net funded debt to consolidated EBITDA ratio to 4.00:1 for the fiscal quarter endingJune 30, 2020 , 4.50:1 for the fiscal quarters throughSeptember 30, 2021 , 4.00:1 for the fiscal quarter endingDecember 31, 2021 , and 3:50:1 for fiscal quarters thereafter; and (d) reducing the priority debt basket to 24% of Consolidated Net Tangible Assets, as defined in the Credit Agreements, through and includingDecember 31, 2021 . As part of this amendment, the Company has agreed to pay a 10 basis point fee on the consenting lenders commitments under the Credit Agreements. The Credit Agreements also contain customary default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants and cross-defaults to other material indebtedness. The occurrence of an event of default under the Credit Agreements could result in all loans and other obligations becoming immediately due and payable and the credit facility being terminated. If conditions caused by the COVID-19 pandemic worsen and the Company's earnings and cash flow from operations do not start to recover as contemplated in the Company's current plans, the Company may not be able to maintain compliance with its amended financial covenant and it will require the Company to seek additional amendments to the Credit Agreements. If the Company is not able to obtain such necessary additional amendments, this would lead to an event of default and its lenders could require the Company to repay its outstanding debt. In that situation, the Company may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders. Certain representations, warranties and covenants under the 2018 Credit Agreement were conformed to those under the 2019 Credit Facility following an amendment entered into onAugust 14, 2019 . OnMay 29, 2013 , we entered into agreements to initiate a commercial paper program on a private placement basis under which we may issue unsecured commercial paper notes (the "Commercial Paper Notes") from time-to-time up to a maximum aggregate principal amount outstanding at any time of$750.0 million . The proceeds from the issuance of the Commercial Paper Notes are expected to be used for general corporate purposes, including the repayment of other debt of the Company. The Credit Agreements are available to repay the Commercial Paper Notes, if necessary. Aggregate borrowings outstanding under the Credit Agreements and the Commercial Paper Notes will not exceed the$1.2 billion current maximum amount available under the Credit Agreements. 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. AtMarch 31, 2020 , we had$35.0 million of Commercial Paper Notes outstanding bearing a weighted-average interest rate of approximately 1.72% and a weighted-average maturity of 22 days. The Commercial Paper Notes are classified as Current portion of long-term debt in our condensed consolidated balance sheets atMarch 31, 2020 andDecember 31, 2019 . 35
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The non-current portion of our long-term debt amounted to$3.11 billion atMarch 31, 2020 , compared to$2.86 billion atDecember 31, 2019 . In addition, atMarch 31, 2020 , we had availability to borrow$915.0 million under our commercial paper program and the Credit Agreements, and$189.6 million under other existing lines of credit, subject to various financial covenants under our Credit Agreements. We have the ability and intent to refinance our borrowings under our other existing credit lines with borrowings under the Credit Agreements, as applicable. Therefore, the amounts outstanding under those credit lines, if any, are classified as long-term debt. We believe that as ofMarch 31, 2020 , we were, and currently are, in compliance with all of our long-term debt covenants. Off-Balance Sheet Arrangements In the ordinary course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, including bank guarantees and letters of credit, which totaled approximately$83.4 million atMarch 31, 2020 . None of these off-balance sheet arrangements has, or is likely to have, a material effect on our current or future financial condition, results of operations, liquidity or capital resources. Other Obligations Our contractual obligations have not significantly changed based on our ordinary business activities and projected capital expenditures from the information we provided in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Total expected 2020 contributions to our domestic and foreign qualified and nonqualified pension plans, including our SERP, should approximate$13 million . We may choose to make additional pension contributions in excess of this amount. We have made contributions of$5.4 million to our domestic and foreign pension plans (both qualified and nonqualified) during the three-month period endedMarch 31, 2020 . The liability related to uncertain tax positions, including interest and penalties, recorded in Other noncurrent liabilities totaled$20.4 million atMarch 31, 2020 and$21.2 million atDecember 31, 2019 . Related assets for corresponding offsetting benefits recorded in Other assets totaled$25.6 million atMarch 31, 2020 and$26.1 million atDecember 31, 2019 . We cannot estimate the amounts of any cash payments associated with these liabilities for the remainder of 2020 or the next twelve months, and we are unable to estimate the timing of any such cash payments in the future at this time. We are subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To our knowledge, we are currently complying, and expect to continue to comply, in all material respects with applicable environmental laws, regulations, statutes and ordinances. Compliance with existing federal, state, local and foreign environmental protection laws is not expected to have a material effect on capital expenditures, earnings or our competitive position, but the costs associated with increased legal or regulatory requirements could have an adverse effect on our operating results. Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a potentially responsible party ("PRP"), and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in cases in which we may have liability as a PRP, our liability for our share of cleanup is de minimis. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not have a material adverse effect upon our results of operations or financial condition. Liquidity Outlook We anticipate that cash on hand and cash provided by operating activities, divestitures and borrowings will be sufficient to pay our operating expenses, satisfy debt service obligations, fund any capital expenditures and share repurchases, make acquisitions, make pension contributions and pay dividends for the foreseeable future. Our main focus during the uncertainty surrounding COVID-19 is to continue to maintain financial flexibility by delaying certain capital expenditure projects and accelerating our cost savings initiative, while still protecting our employees and customers, committing to shareholder returns and maintaining an investment grade rating. Over the next three years, in terms of uses of cash, we will still 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. In 2019, we announced that we have begun to pursue opportunities to divest our PCS and fine chemistry services businesses. Travel restrictions from COVID-19 have temporarily delayed due diligence processes associated with these potential divestitures. 36
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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. COVID-19 has not a material impact on our liquidity to date, however we cannot predict the overall impact in terms of cash flow generation as it will depend on the length and severity of the outbreak. As a result, we are planning for various economic scenarios and actively monitoring our balance sheet to maintain the financial flexibility needed. 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 the COVID-19 pandemic or global economic and/or geopolitical concerns may limit efficient access to such markets for extended periods of time. If such concerns heighten, we may incur increased borrowing costs and reduced credit capacity as our various credit facilities mature. When theU.S. Federal Reserve or similar national reserve banks in other countries decide to tighten the monetary supply in response, for example, to improving economic conditions, we may incur increased borrowing costs as interest rates increase on our variable rate credit facilities, as our various credit facilities mature or as we refinance any maturing fixed rate debt obligations, although these cost increases would be partially offset by increased income rates on portions of our cash deposits. Overall, with generally strong cash-generative businesses and no significant long-term debt maturities before 2021, we believe we have, and will maintain, a solid liquidity position. As previously reported in 2018, following receipt of information regarding potential improper payments being made by third party sales representatives of our Refining Solutions business, within our Catalysts segment, we promptly retained outside counsel and forensic accountants to investigate potential violations of the Company's Code of Conduct, the Foreign Corrupt Practices Act and other potentially applicable laws. Based on this internal investigation, we have voluntarily self-reported potential issues relating to the use of third party sales representatives in our Refining Solutions business, within our Catalysts segment, to theU.S. Department of Justice ("DOJ"), theSEC , and the Dutch Public Prosecutor ("DPP"), and are cooperating with the DOJ, theSEC , and DPP 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, theSEC , or DPP. We are unable to predict what, if any, action may be taken by the DOJ, theSEC , or DPP, or what penalties or remedial actions they may seek to impose. Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of fines, penalties, disgorgement, equitable relief or other losses. We do not believe, however, that any 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$553.2 million atMarch 31, 2020 , of which$429.6 million is held by our foreign subsidiaries. This cash represents an important source of our liquidity and is invested in bank accounts or money market investments with no limitations on access. The cash held by our foreign subsidiaries is intended for use outside of theU.S. We anticipate that any needs for liquidity within theU.S. in excess of our cash held in theU.S. can be readily satisfied with borrowings under our existingU.S. credit facilities or our commercial paper program. Summary of Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates from the information we provided in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Recent Accounting Pronouncements For a description of recent accounting pronouncements, see Item 1 Financial Statements - Note 18, "Recently Issued Accounting Pronouncements." Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no significant changes in our interest rate risk, foreign currency exchange rate exposure, marketable securities price risk or raw material price risk from the information we provided in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We had variable interest rate borrowings of$492.3 million outstanding atMarch 31, 2020 , bearing a weighted average interest rate of 2.30% and representing approximately 16% of our total outstanding debt. A hypothetical 10% change (approximately 23 basis points) in the interest rate applicable to these borrowings would change our annualized interest 37
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expense by approximately$1.1 million as ofMarch 31, 2020 . 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$1.18 billion and with a fair value representing a net liability position of$48.9 million atMarch 31, 2020 . 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 ofMarch 31, 2020 , with all other variables held constant. A 10% appreciation of theU.S. Dollar against foreign currencies that we hedge would result in a decrease of approximately$46.4 million in the fair value of our foreign currency forward contracts. A 10% depreciation of theU.S. Dollar against these foreign currencies would result in an increase of approximately$46.0 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 ofMarch 31, 2020 , without reflecting the effects of underlying anticipated transactions. When those anticipated transactions are realized, actual effects of changing foreign currency exchange rates could have a material impact on our earnings and cash flows in future periods. Item 4. Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in theSEC'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. The Company is continuing the implementation of a new enterprise resource platform system to increase the overall efficiency and productivity of our processes, which will result in changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) throughout the implementation process in 2020. There have been no other changes during the first quarter endedMarch 31, 2020 to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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