LIVENT You should read the following discussion and analysis in conjunction with our financial statements and the related notes included elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Form 10-K.
OVERVIEW
We are a pure-play, fully integrated lithium company, with a long, proven history of producing performance lithium compounds. Our primary products, namely battery-grade lithium hydroxide, lithium carbonate, butyllithium and high purity lithium metal are critical inputs used in various performance applications. Our strategy is to focus on supplying high performance lithium compounds to the rapidly growing EV and broader energy storage battery markets, while continuing to maintain our position as a leading global producer of butyllithium and high purity lithium metal. With extensive global capabilities, approximately 80 years of continuous production experience, applications and technical expertise and deep customer relationships, we believe we are well positioned to capitalize on the accelerating trend of electrification. We produce lithium compounds for use in applications that have specific and constantly changing performance requirements, including battery-grade lithium hydroxide for use in high performance lithium-ion batteries. We believe the demand for our compounds will continue to grow as the electrification of transportation accelerates, and as the use of high nickel content cathode materials increases in the next generation of battery technology products. We also supply butyllithium, which is used in the production of polymers and pharmaceutical products, as well as a range of specialty lithium compounds including high purity lithium metal, which is used in the production of lightweight materials for aerospace applications and non-rechargeable batteries. It is in these applications that we have established a differentiated position in the market through our ability to consistently produce and deliver performance lithium compounds.
2021 Highlights
The following are the more significant developments in our business during the
year ended
•Revenue of
•Gross margin of$88.4 million in 2021 increased$51.6 million versus 2020 primarily due to higher sales volumes and higher pricing, partially offset by COVID-19 costs to implement safety protocols and higher logistics, raw material and other operating costs. •Net income of$0.6 million in 2021 compared to net loss of$16.3 million for 2020 was primarily due to higher sales volumes, higher pricing and lower Restructuring and other charges, offset by an increase in theArgentina tax expense from inflationary tax adjustments, incremental COVID-19 costs to implement safety protocols, higher logistics, raw material and other operating costs and$5.5 million Equity in net loss of unconsolidated affiliates. •Adjusted EBITDA of$69.5 million for 2021 increased$47.2 million compared to the 2020 amount of$22.3 million primarily due to higher sales volumes and higher pricing, partially offset by higher logistics, raw material and other operating costs.
Completion of Public Offering of Our Common Stock
OnJune 15, 2021 , the Company closed on the issuance of 14,950,000 shares of its common stock, par value$0.001 per share, at a public offering price of$17.50 per share, in an underwritten public offering (the "Offering"). Total net proceeds from the Offering, were$252.2 million after deducting the underwriters' fees and offering expenses payable by the Company of$9.4 million . We intend to use the net proceeds of the Offering primarily for growth capital expenditures, including lithium capacity expansion, and for general corporate purposes. InJune 2021 , we used a portion of the proceeds to repay all amounts outstanding under our Revolving Credit Facility.
COVID-19 Impacts
Business and Operations
During the year endedDecember 31, 2021 , the COVID-19 pandemic continued to negatively impact our business, operations and financial performance. We still face operational challenges and uncertainties. The disruptions and duration may be impacted by the actions that governments, businesses and individuals take in relation to the COVID-19 pandemic, new variants 41
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of the virus, vaccine safety concerns, vaccine resistance, vaccine availability, delays in vaccine distribution and the willingness of individuals to be vaccinated.
Each country where we operate has adopted measures to contain COVID-19, and each may adopt different and/or stricter measures in the future. The government ofArgentina , where the Company's primary lithium brine resource is located, has enacted numerous emergency measures to stem the spread of COVID-19 and may enact new ones. We expect government measures and restrictions globally to continue to have a negative impact on demand for certain of our products and a negative impact on the efficient operation of our facilities, supply chains and logistics. Disruptions and delays within our supply chain and logistics operations included problems and congestion at ports, difficulties with scheduling cargo ships, higher shipment and freight costs, additional warehouse costs due to shipment delays, lack of driver availability and fewer transportation options, and the restriction of movements by trucks within and between countries. The severity of these problems and issues has varied in different geographic locations over the course of the COVID-19 pandemic and continues to remain a challenge in all of the countries where we operate. Customer demand for certain types of our products improved during 2021. However, customers continue to protect their interests by diversifying among multiple suppliers. They continue to actively manage their own inventory levels in the current uncertain market environment. In addition, customers in the fast-growing EV manufacturing industry are currently experiencing their own supply chain challenges, including semiconductors shortages, congestion at ports, and rolling electricity blackouts inChina . The semiconductor chip shortage is expected to continue. This, and similar supply chain disruptions experienced by our customers, could cause delays in their demand for our high performance lithium compounds, further adversely impacting our business and growth plans. The continuing spread and effects of COVID-19, including health and safety protocols and supply and logistics disruptions inChina and elsewhere, are impacting our expansion work inArgentina and theU.S. There can be no assurance that such impacts will not turn into long-term or continuing delays, cause us to decide to suspend our capital expansion work, or otherwise negatively impact our capital expansion. Any significant delay in our capital expansion work inArgentina or theU.S. could have a material adverse effect on our business, financial condition and results of operations. In addition to delays, there have been increased costs due to less availability of materials for construction. We have not faced any material issues with employee morale or attrition. Likewise, we have not faced any material issues with our ability to recruit new employees or in talent management of existing employees. However, certain of our employees may resign, and we may be unable to attract certain talent, if we were to impose any vaccine mandate. Broadly, we are observing tightness in the local labor markets where we operate in both theU.S. andArgentina (e.g., fewer applicants and higher wages). This may impact us and our expansion efforts, our customers and suppliers in the future. The material operational challenges that management and our Board of Directors are monitoring are the health and safety of our employees, vaccine availability and distribution, travel restrictions, COVID-19 mitigation measures, the relaxation of work from home requirements, the restriction of movements within and between countries, and supply chain and logistics issues. Furthermore, our Board of Directors is monitoring the additional expected and unexpected impacts that COVID-19 is having on the economies in the countries where we operate, such asArgentina where inflation remains high and economic instability persists, andChina where economic growth has led to shortages of electricity and temporary shutdowns of third party providers to the Company.
Liquidity and Financial Resources
Our uses of cash were impacted by the effects of COVID-19 in 2021. We continue to face logistical supply disruptions, such as higher truck, freight and sea shipping costs, along with the need to use air freight from time to time. We expect this to continue. We also continue to use cash to purchase additional COVID-19 testing, personal protective equipment for our employees, such as masks and gloves, and for increased cleaning and disinfectant costs, additional medical personnel at our facilities, and increased personnel transportation costs due to social distancing guidelines.
Corporate Efforts
We continue to maintain a
We continue to identify potential new suppliers and logistics providers for our
operations as supply chain challenges continue. This includes potential new
suppliers of chemicals and packaging, and air freight companies when required.
We have altered global production schedules to meet changes in customer demand,
supply and logistics challenges. Future efforts will continue along these lines
and be dictated by the particulars of the COVID-19 pandemic. We continue to plan
for a relaxation of
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COVID-19 protocols, more business travel and in-person customer contacts and hybrid work arrangements if and when COVID-19 becomes endemic.
Health & Safety
We continue to protect the health and well-being of our employees, customers and other key stakeholders in accordance with changing circumstances and local conditions. Our plant personnel continue to remain on the job at their respective facilities. We instituted safety procedures to protect the health of these plant personnel based upon local guidance. This can include pre-entry screening, the use of masks and gloves, social distancing measures, and quarantine of close contacts with suspected or confirmed COVID-19 cases. Our non-plant personnel are returning to their offices where permitted by circumstances. Business travel is slowly resuming when permitted, but is still substantially lower than pre-pandemic levels. Communications relating to all of these policies and COVID-19 preventative measures are regularly distributed to our employees, as there can be significant variation with respect to the COVID-19 pandemic situation in different geographic regions at any one time.
We base our health and safety protocols on the advice provided by the
In theU.S. , we are providing paid sick leave for qualified absences due to COVID-19. In other geographic locations, we are providing our customary local sick leave benefits and any other leave and benefits that may be required by local governmental authorities. We have not experienced any material employee absences as a result of COVID-19. However, social distancing measures and other health and safety protocols have led to reduced workforce numbers in certain locations, such as with our expansion project inArgentina . If a significant number of our employees at any one location were to require leave as a result of COVID-19, this could pose a risk to the continued operation of the particular facility and could potentially disrupt our broader operations.
Government Programs.
We continue to evaluate government support and tax relief programs in the countries where we operate. This includes support grants, loans, tax deferrals, and tax credits.
Overall, the impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted.
2022 Outlook
We expect flat volumes and significantly higher average pricing across our
lithium products in 2022, resulting in higher profitability versus the prior
year. We also expect higher costs versus the prior year, primarily related to
logistics, raw materials and general inflationary pressures.
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In this section, we discuss the results of our operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Results of Operations - Years Ended
Year Ended December 31,
(in Millions) 2021 2020
Revenue $ 420.4 $ 288.2
Costs and expenses:
Costs of sales 332.0 251.4
Gross margin 88.4 36.8
Selling, general and administrative expenses 49.9 44.6
Research and development expenses 3.0 3.7
Restructuring and other charges 3.8 10.7
Separation-related costs/(income) 2.0 (1.1)
Total costs and expenses 390.7 309.3
Income/(loss) from operations before loss on debt extinguishment, equity in net loss of unconsolidated affiliates and interest expense, net
29.7 (21.1)
Loss on debt extinguishment - 0.1
Equity in net loss of unconsolidated affiliates 5.5 0.5
Interest expense, net 0.3 0.3
Income/(loss) from operations before income taxes 23.9 (22.0)
Income tax expense/(benefit) 23.3 (5.7)
Net income/(loss) $ 0.6 $ (16.3)
In addition to net income/(loss), as determined in accordance with U.S. GAAP, we
evaluate operating performance using certain Non-GAAP measures such as EBITDA,
which we define as net income plus interest expense, net, income tax
expense/(benefit), and depreciation and amortization, and Adjusted EBITDA, which
we define as EBITDA adjusted for Argentina remeasurement losses, restructuring
and other charges, separation-related costs/(income), COVID-19 related costs and
other loss/(gain). Management believes the use of these Non-GAAP measures allows
management and investors to compare more easily the financial performance of its
underlying business from period to period. The Non-GAAP information provided may
not be comparable to similar measures disclosed by other companies because of
differing methods used by other companies in calculating EBITDA and Adjusted
EBITDA. These measures should not be considered as a substitute for net
income/(loss) or other measures of performance or liquidity reported in
accordance with U.S. GAAP. The following table reconciles EBITDA and Adjusted
EBITDA from net income/(loss).
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Year Ended December 31,
(in Millions) 2021 2020
Net income/(loss) $ 0.6 $ (16.3)
Add back:
Income tax expense/(benefit) 23.3 (5.7)
Interest expense, net 0.3 0.3
Depreciation and amortization 25.1 25.0
EBITDA (Non-GAAP) 49.3 3.3
Add back:
Argentina remeasurement losses (a) 5.3 6.6
Restructuring and other charges (b) 3.8 10.7
Separation-related costs/(income) (c) 2.0 (1.1)
COVID-19 related costs (d) 5.2 3.2
Loss on debt extinguishment (e) - 0.1
Other loss/(gain) (f) 3.9 (0.5)
Adjusted EBITDA (Non-GAAP) $ 69.5 $ 22.3
____________________
a.Represents impact of currency fluctuations on tax assets and liabilities and
on long-term monetary assets associated with our capital expansion as well as
significant currency devaluations. The remeasurement losses are included within
"Cost of sales" in our consolidated statement of operations but are excluded
from our calculation of Adjusted EBITDA because of: i.) their nature as income
tax related; ii.) their association with long-term capital projects which will
not be operational until future periods; or iii.) the severity of the
devaluations and their immediate impact on our operations in the country.
b.We continually perform strategic reviews and assess the return on our
business. This sometimes results in management changes or in a plan to
restructure the operations of our business. As part of these restructuring
plans, demolition costs and write-downs of long-lived assets may occur. 2021
Restructuring and other charges consisted primarily of environmental
remediation, transaction related legal fees and miscellaneous nonrecurring
costs. 2020 consists of severance-related costs related to management changes,
exit costs, and legal fees related to IPO securities litigation, including a
settlement accrual, net of insurance reimbursement, of $2.0 million as of
December 31, 2020 . The IPO litigation settlement was finalized in the second
quarter of 2021.
c.Represents legal and professional fees and other separation-related activity.
d.Represents incremental costs associated with the COVID-19 pandemic recorded in "Cost of sales" in the consolidated statement of operations, including but not limited to, incremental quarantine related absenteeism, incremental facility cleaning costs, COVID-19 testing, pandemic related supplies and personal protective equipment for employees, among other costs; offset by economic relief provided by foreign governments. e.Represents the partial write off of deferred financing costs for the temporary reduction in borrowing capacity of the Revolving Credit Facility excluded from our calculation of Adjusted EBITDA because the loss is nonrecurring. f.2021 represents our 25% interest in transaction costs incurred for the Nemaska Transaction, certain project-related costs and interest expense, all included in Equity in net loss of unconsolidated affiliates in our consolidated statement of operations. 2020 represents a portion of our nonrefundable prepaid research and development costs advanced to our unconsolidated affiliate in the fourth quarter 2019 and excluded from our calculation of Adjusted EBITDA in the same period because the costs represent research and development activities of the affiliate that had not occurred as ofDecember 31, 2019 . These costs were included with our calculation of Adjusted EBITDA in 2020 when the costs were incurred at our unconsolidated affiliate.
Year Ended
Revenue
Revenue of$420.4 million for 2021 increased by approximately 46%, or$132.2 million , versus$288.2 million for 2020 primarily due to higher volumes, driven by an increase in customer demand and higher pricing.
Gross Margin
Gross margin of$88.4 million for 2021 increased by$51.6 million , or approximately 140%, versus$36.8 million for 2020. The increase in gross margin was primarily due to sales volumes and higher pricing, partially offset by COVID-19 costs to implement safety protocols and higher logistics, raw material and other operating costs. 45
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Selling, general and administrative expenses
Selling, general and administrative expenses of$49.9 million for 2021 increased by$5.3 million , or approximately 12% versus$44.6 million in 2020. The increase in selling, general and administrative expenses was primarily due to an increase in employee compensation.
Restructuring and other charges
Restructuring and other charges of$3.8 million for 2021 decreased by$6.9 million or approximately 64% versus$10.7 million for 2020. Restructuring and other charges for 2020 consisted of severance-related costs for management changes at certain operating and administrative facilities, exit costs of$1.6 million for the closing of leased office space and legal fees related to IPO securities litigation, including a settlement accrual, net of insurance reimbursement, of$2.0 million as ofDecember 31, 2020 . The IPO litigation settlement was finalized in the second quarter of 2021. 2021 Restructuring and other charges consisted primarily of environmental remediation, transaction related legal fees and miscellaneous nonrecurring costs. See Note 8 to our consolidated financial statements of this Form 10-K for details.
Equity in net loss of unconsolidated affiliates
Equity in net loss of unconsolidated affiliates of
Interest expense
Interest expense of$0.3 million for 2021 and 2020 is noncash amortization of transaction costs related to the 2025 Notes which represents the excess interest over the amount of interest capitalized in accordance withU.S. GAAP for 2021. Interest expense of$15.4 million and$12.0 million was capitalized in 2021 and 2020, respectively. Income tax expense/(benefit) The increase in income tax expense to$23.3 million for 2021 compared to the income tax benefit of$(5.7) million for 2020 was primarily due to the fluctuations in foreign currency impacts inArgentina of$15.5 million and$(10.0) million for 2021 and 2020, respectively. Within foreign currency impacts,Argentina tax law annually requires an increase to taxable income for inflationary adjustments in the period when the consumer price index fluctuates over a specific threshold, which for 2021 was met in the third quarter of 2021. Additionally, the increase in tax expense was due to income/(loss) from operations of$23.9 million and$(22.0) million for 2021 and 2020, respectively. The increase in income tax expense was partially offset by anArgentina income tax law, which was amended onJune 16, 2021 to introduce new progressive corporate income tax rates from 25% to 35%. This change resulted in a tax benefit of$(2.2) million for the revaluation ofArgentina net deferred tax assets for the twelve months endedDecember 31, 2021 .
Net income/(loss)
Net income of$0.6 million for 2021 compared to net loss of$16.3 million for 2020 was primarily due to higher sales volumes, higher pricing and lower Restructuring and other charges, offset by an increase in income tax expense, COVID-19 costs to implement safety protocols, higher logistics, raw material and other operating costs and$5.5 million Equity in net loss of unconsolidated affiliate. 46
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Liquidity and Capital Resources
Our prospective success in funding our cash needs will depend on the strength of the lithium market and our continued ability to generate cash from operations and raise capital from other sources. Our primary sources of cash are currently generated from operations and borrowings under our revolving credit facility. Cash and cash equivalents as ofDecember 31, 2021 and 2020, were$113.0 million and$11.6 million , respectively. Of the cash and cash equivalents balance as ofDecember 31, 2021 and 2020,$26.9 million and$10.6 million was held by our foreign subsidiaries, respectively. The cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operating activities and future foreign investments. We have not provided additional income taxes for any additional outside basis differences inherent in our investments in subsidiaries because the investments are essentially permanent in duration or we have concluded that no additional tax liability will arise upon disposal. See Note 11 to the consolidated financial statements included within this Form 10-K for more information.
2025 Notes
In 2020, we issued$245.8 million in aggregate principal amount of 4.125% Convertible Senior Notes due 2025. Total net proceeds received were$238.2 million . The Company used the net proceeds received to repay amounts outstanding under its Revolving Credit Facility. The 2025 Notes were issued under theInternational Capital Market Association's Green Bond framework and followed the Green Bond Principles. See Note 11 to the consolidated financial statements included within this Form 10-K for more details on the 2025 Notes.
Revolving Credit Facility
The Credit Agreement provides for a$400 million senior secured revolving credit facility,$50 million of which is available for the issuance of letters of credit, with an option, subject to certain conditions and limitations, to increase the aggregate amount of the revolving credit commitments to$600 million (the "Revolving Credit Facility"). The issuance of letters of credit and the proceeds of revolving credit loans made pursuant to the Revolving Credit Facility are available, and will be used, for general corporate purposes, including capital expenditures and permitted acquisitions. See Note 11 to the consolidated financial statements included within this Form 10-K for more information. We had$245.8 million and$281.4 million debt outstanding as ofDecember 31, 2021 and 2020, respectively. OurDecember 31, 2021 debt outstanding was comprised solely of our 2025 Notes because inJune 2021 we used a portion of the net proceeds from the Offering to repay all amounts outstanding under our Revolving Credit Facility. The Credit Agreement contains certain affirmative and negative covenants that are binding on the Borrowers and their subsidiaries, including, among others, restrictions (subject to exceptions and qualifications) on the ability of the Borrowers and their subsidiaries to create liens, to undertake fundamental changes, to incur debt, to sell or dispose of assets, to make investments, to make restricted payments such as dividends, distributions or equity repurchases, to change the nature of their businesses, to enter into transactions with affiliates and to enter into certain burdensome agreements. Among other restrictions, our Revolving Credit Facility contains financial covenants applicable toLivent and its consolidated subsidiaries related to leverage (measured as the ratio of debt to adjusted earnings) and interest coverage (measured as the ratio of adjusted earnings to interest expense). Our maximum allowable first lien leverage ratio is 3.5 as ofDecember 31, 2021 . Our minimum allowable interest coverage ratio is 3.5. We were in compliance with all covenants atDecember 31, 2021 .
Statement of Cash Flows
Cash provided by operating activities was
The increase in cash provided by operating activities for 2021 compared to 2020 was primarily driven by higher net income and a decrease in payments of accounts payables in 2021 compared to 2020, partially offset by an increase in trade receivables and inventories in 2021 compared to 2020.
Cash used in investing activities was
The increase in cash used in investing activities for 2021 compared to 2020 is primarily due to the Company's election to suspend all capital expansion work globally inMarch 2020 to the second quarter of 2021. The time lag of slowing down and subsequently ramping back up capital spending ended in the third quarter of 2021 and resulted in a significant increase in capital expenditures for capacity expansion of lithium carbonate and hydroxide during the fourth quarter of 2021.
Cash provided by financing activities was
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The increase in cash provided by financing activities for 2021 compared to 2020 is primarily due to the net proceeds received from the Offering of$252.2 million in the second quarter of 2021, partially offset by the repayment of the Revolving Credit Facility in the same period.
Other potential liquidity needs
We plan to meet our liquidity needs through available cash, cash generated from operations, borrowings under the committed Revolving Credit Facility, and other potential working capital financing strategies that may be available to us. As ofDecember 31, 2021 , our remaining borrowing capacity under our Revolving Credit Facility, subject to meeting our debt covenants, was$385.5 million , including letters of credit utilization. We expect the COVID-19 pandemic uncertainties, and the resulting lithium market challenges to continue in 2022. Our net leverage ratio is determined, in large part, by our ability to manage the timing and amount of our capital expenditures, which is within our control. It is also determined by our ability to achieve forecasted operating results and to pursue other working capital financing strategies that may be available to us, which is less certain and outside our control. In the first quarter of 2020, because of the significant practical constraints resulting from actions being taken by authorities around the word in response to the COVID-19 pandemic, the Company elected to suspend all capital expansion work globally. As of the second quarter of 2021,Livent resumed its capital expansion work inArgentina and theU.S. Based on this resumption, the Company estimates 2022 total capital spending to be in the range of$280 million to$320 million . The company remains focused on maintaining its financial flexibility and will continue to manage its cash flow and capital allocation decisions to navigate through this challenging environment. We believe that our available cash and cash from operations, together with our borrowing availability under the Revolving Credit Facility and other potential financing strategies that may be available to us, will provide adequate liquidity for the next 12 months. Access to capital and the availability of financing on acceptable terms in the future will be affected by many factors, including our credit rating, economic conditions, the COVID-19 pandemic and the overall liquidity of capital markets and cannot be guaranteed.
Contractual Obligations and Commercial Commitments
As ofDecember 31, 2021 , we have significant committed contracts that we believe will affect cash over the next three years. These contracts represent certain of our raw material commercial contract purchase obligations that are enforceable and legally binding requirements contracts with specified quantities, pricing and timing of transactions. Expected cash payments for such purchase obligations are$3.5 million in 2022,$4.9 million in 2023 and$2.8 million for 2024.
Climate Change
The potential physical impacts of climate change on our operations are highly uncertain, and are specific to the geographic circumstances of areas in which we operate. These may include changes in rainfall and storm patterns and intensities, droughts and water shortages, changing sea levels and changing temperatures, and an increase in the number and severity of weather events and natural disasters. These changes may have a material adverse effect on our operations, including lithium extraction and production processes, as well as transportation of raw materials and delivery of products to customers. We may also face more stringent customer and regulatory requirements to accelerate the pace of our GHG and water use reduction initiatives, including achievement of our 2040 net zero target, more reliance on renewable energy sources and more water re-use and re-cycling. Climate change may also exacerbate socio-economic and political issues around the world and have other direct impacts to ecosystems, human health and quality of life, ranging from destruction of habitats to air, water and land quality to growing incidences of famines, pandemics and population shifts. In addition, a number of governmental bodies have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. Such legislation or regulation, if enacted, potentially could include provisions for a "cap and trade" system of allowances and credits or a carbon tax, among other provisions. There is also a potential for climate change legislation and regulation to adversely impact the cost of purchased energy and electricity. The growing concerns about climate change and related increasingly stringent regulations may provideLivent with new or expanded business opportunities.Livent's technologies and applications contribute to the efforts of our customers to revolutionize their product lines and markets. As a key part of the EV and battery supply chain, we provide lithium products that help enable the growth of electric transportation and the shift away from fossil fuels. As demand for, and legislation mandating or incentivizing the use of, alternative fuel technologies that limit or eliminate greenhouse gas emissions increases, we will continue to monitor the market and offer solutions where we have appropriate technology. In 2020,Livent began the voluntary process of implementing the framework established by theTask Force for Climate-Related Financial Disclosures ("TCFD") to assess, disclose and plan for the company's risks and opportunities related to climate change. As part of this process, we will evaluate various climate-related scenarios and business models in a net zero economy. 48
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More information on TCFD will be provided in our future Sustainability Reports and other disclosures. Nothing in any of our Sustainability Reports, or sections thereof, shall be deemed incorporated by reference into this Form 10-K.
Recently Issued and Adopted Accounting Pronouncements and Regulatory Items
See Note 3 "Recently Issued and Adopted Accounting Pronouncements and Regulatory Items" to our consolidated financial statements included in this Form 10-K.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity withU.S. GAAP. The preparation of these financial statements requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and that have or could have a material impact on our financial condition and results of operations. We have described our accounting policies in Note 2 "Principal Accounting Policies and Related Financial Information" to our consolidated financial statements included in this Form 10-K. TheSEC has defined critical accounting estimates as those estimates made in accordance withU.S. GAAP that involve a significant level of measurement uncertainty and have had or are reasonably likely to have a material impact on the financial condition or operating performance of a company. We have reviewed these accounting estimates, identifying those that we believe contain matters that are inherently uncertain, have significant levels of subjectivity and complex judgments and are critical to the preparation and understanding of our consolidated financial statements. We have reviewed these critical accounting estimates with the Audit Committee of the Board of Directors. Critical accounting estimates are central to our presentation of results of operations and financial condition in accordance withU.S. GAAP and require management to make judgments, assumptions and estimates on certain matters. We base our estimates, assumptions and judgments on historical experience, current conditions and other reasonable factors. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The estimates used for, but not limited to, revenue recognition and the collectability of trade receivables, impairment and valuation of long-lived assets, and income taxes could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Form 10-K. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Revenue recognition
Sale of Goods
Revenue from product sales is recognized when we transfer control of the
promised goods to a customer. We determine when the control of goods is
transferred typically by assessing, among other things, the transfer of title
and risk and the shipping terms of the contract. Judgment is sometimes required
when assessing specific customer facts and circumstances surrounding transfer of
control.
Variable Consideration
As a part of our customary business practice, we may offer sales incentives to
our customers, such as volume discounts or rebates. Variable consideration given
can differ by product. For all such contracts that include any variable
consideration, we estimate the amount of variable consideration that should be
included in the transaction price utilizing either the expected value method or
the most likely amount method depending on the nature of the variable
consideration. Although determining the transaction price requires significant
judgment, we have significant historical experience with incentives provided to
customers and estimating the expected consideration considering historical
patterns of incentive payouts. These estimates are re-assessed each reporting
period as required.
In addition to the variable consideration described above, in certain instances,
we may require our customers to meet certain volume thresholds within their
contract term. We estimate what amount of variable consideration should be
included in the transaction price at contract inception and continually reassess
this estimation each reporting period to determine situations when the minimum
volume thresholds will not be met. Variable consideration is included in the
transaction price if, in our judgment, it is probable that a significant future
reversal of cumulative revenue under the contract will not occur. In those
circumstances, we apply the guidance on breakage and estimate the amount of the
shortfall and recognize it over the remaining performance obligations in the
contract.
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Right of Return
We warrant to our customers that our products conform to mutually agreed product specifications. This offering is accounted for as a right of return and the transaction price is adjusted for an estimate of expected returns.
Trade and other receivables
The allowance for trade receivables represents our best estimate of the probable losses associated with potential customer defaults. In developing our allowance for trade receivables, we consider general factors such as historical experience, current collection trends and external economic and political factors as well as specific customer circumstances where the risk of collection has been reasonably identified either due to liquidity constraints or disputes over contractual terms and conditions. One of our subsidiaries that conducts business withinArgentina has outstanding receivables due from theArgentina government, which primarily represent export tax and export rebate receivables. As with all outstanding receivable balances, we continually review recoverability by analyzing historical experience, current collection trends and regional business and political factors among other factors.
Impairments and valuation of long-lived assets
Our long-lived assets primarily include property, plant and equipment and intangible assets. The Company has no goodwill or indefinite-lived intangible assets as ofDecember 31, 2021 . We periodically evaluate whether events or circumstances indicate that the net book value of our property, plant and equipment may not be recoverable ("triggering events"). We exercise significant judgment in performing this evaluation, considering factors such as general market outlooks, company-specific historical results as well as future forecasts for production, operating income and cash flows. No triggering events occurred during 2021. Income taxes Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Also inherent in determining our annual tax rate are judgements and assumptions regarding the recoverability of certain deferred tax balances, primarily net operating loss and other carryforwards, and our ability to uphold certain tax positions. We have recorded a valuation allowance to reduce deferred tax assets in certain jurisdictions to the amount that we believe is more likely than not to be realized. In assessing the need for this allowance, we have considered a number of factors including future taxable income, the jurisdictions in which such income is earned and our ongoing tax planning strategies. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Similarly, should we conclude that we would be able to realize certain deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Additionally, we filed income tax returns in theU.S. and various state and foreign jurisdictions, as part of a FMC legal entity for the period endedFebruary 28, 2019 . Certain income tax returns for FMC entities taxable in theU.S. and significant foreign jurisdictions are open for examination and adjustment. We assess our income tax positions and record a liability for all years open to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The evaluation of the Company's uncertain tax positions involves significant judgment in the interpretation and application ofU.S. GAAP and complex domestic and international tax laws. Although management believes the Company's uncertain tax positions are reasonable, no assurance can be given that these matters will not be subject to successful challenge by the applicable taxing authority and the final tax outcome will not be different from that which is reflected in the Company's reserves. Because there are a number of estimates and assumptions inherent in calculating the various components of our tax provision, certain changes or future events such as changes in tax legislation, geographic mix of earnings and completion of tax audits could have an impact on those estimates, our effective tax rate and financial results.
See Note 10 to our consolidated financial statements included in this Form 10-K for additional discussion surrounding income taxes.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings, cash flows and financial position are exposed to market risks relating to fluctuations in commodity prices, interest rates and foreign currency exchange rates. Our policy is to minimize exposure to our cash flow over time caused by changes in interest and currency exchange rates. To accomplish this, we have implemented a controlled program of risk management consisting of appropriate derivative contracts entered into with major financial institutions. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates and prices. The range of changes chosen reflects our view of changes that are reasonably possible over a one-year period. Market value estimates are based on the present value of projected future cash flows considering the market rates and prices chosen. As ofDecember 31, 2021 , our net financial instrument position was a net asset of$0.2 million . As ofDecember 31, 2020 , we had no open derivative cash flow hedge contracts.Livent's 2022 hedge plan will be executed in the first quarter of 2022 when management's projections are approved.
Foreign Currency Exchange Rate Risk
Our worldwide operations expose us to currency risk from sales, purchases, expenses and intercompany loans denominated in currencies other than theU.S. dollar, our functional currency. The primary currencies for which we have exchange rate exposure are the Euro, the British pound, the Chinese yuan, the Argentine peso and the Japanese yen. Foreign currency debt and foreign exchange forward contracts are used where we do business, thereby reducing our net asset exposure. Foreign exchange forward contracts are also used to hedge firm and highly anticipated foreign currency cash flows. We currently do not hedge foreign currency risks associated with the Argentine peso due to the limited availability and the high cost of suitable derivative instruments. To analyze the effects of changing foreign currency rates, we perform a sensitivity analysis in which we assume an instantaneous 10% change in the foreign currency exchange rates from their levels atDecember 31, 2021 with all other variables (including interest rates) held constant. As ofDecember 31, 2020 , we had no open derivative cash flow hedge contracts.
Hedged Currency vs. Functional Currency
Net asset position on Net liability Net asset
consolidated balance position with 10% position with
(in Millions) sheets strengthening 10% weakening
Net asset/(liability) position as of December
31, 2021 $ 0.2 $ (2.0) $ 1.6
Interest Rate Risk
One of the strategies that we can use to manage interest rate exposure is to
enter into interest rate swap agreements. In these agreements, we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated on an agreed-upon notional principal amount. As of
December 31, 2021 and 2020, we had no interest rate swap agreements.
Our debt portfolio at December 31, 2021 is composed of fixed-rate and
variable-rate debt; consisting of borrowings under our 2025 Notes and Revolving
Credit Facility. Changes in interest rates affect different portions of our
variable-rate debt portfolio in different ways. As of December 31, 2021 , we had
no outstanding balances under the Revolving Credit Facility.
Based on the variable-rate debt in our debt portfolio at December 31, 2021 , a
one percentage point increase or decrease in interest rates would have increased
or decreased, respectively, gross interest expense by $0.2 million for the year
ended December 31, 2021 .
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