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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2010
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 001-12658
ALBEMARLE CORPORATION
(Exact name of registrant as specified in its charter)
| VIRGINIA | 54-1692118 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
451 Florida Street
Baton Rouge, Louisiana 70801
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 225-388-8011
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| COMMON STOCK, $.01 Par Value | NEW YORK STOCK EXCHANGE |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Number of shares of common stock outstanding as of February 15, 2011: 91,633,335
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $3.6 billion based on the reported last sale price of common stock on June 30, 2010, the last business day of the registrant’s most recently completed second quarter.
Documents Incorporated by Reference
Portions of Albemarle Corporation’s definitive Proxy Statement for its 2011 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Parts II and III of this Form 10-K.
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Albemarle Corporation and Subsidiaries
Year Ended December 31, 2010
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PART I
| Item 1. | Business. |
Albemarle Corporation was incorporated in Virginia in 1993. Our principal executive offices are located at 451 Florida Street, Baton Rouge, Louisiana 70801. Unless the context otherwise indicates, the terms “Albemarle,” “we,” “us,” “our” or “the Company” mean Albemarle Corporation and our consolidated subsidiaries.
We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals for consumer electronics, petroleum refining, utilities, packaging, construction, automotive/transportation, pharmaceuticals, crop protection, food-safety and custom chemistry services. We are committed to global sustainability and are advancing responsible eco-practices and solutions in our three business segments. We believe that our commercial and geographic diversity, technical expertise, flexible, low-cost global manufacturing base, and experienced management team enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.
We and our joint ventures currently operate 45 facilities, encompassing production, research and development facilities, and administrative and sales offices in North and South America, Europe, the Middle East and Asia. We serve approximately 3,000 customers in over 100 countries. For information regarding our unconsolidated joint ventures see Note 8, “Investments” to our consolidated financial statements included in Item 8 beginning on page 47.
Business Segments
Our operations are managed and reported as three operating segments: Polymer Solutions, Catalysts and Fine Chemistry.
For financial information regarding our operating segments, including revenues generated for each of the last three fiscal years from each of the product categories included in our operating segments, and geographic areas, see Note 23, “Operating Segments and Geographic Area Information” to our consolidated financial statements included in Item 8 beginning on page 47.
Polymer Solutions
Our Polymer Solutions segment consists of two product market categories: flame retardants and stabilizers and curatives.
Flame Retardants. Our fire safety technology enables the use of plastics in high performance, high heat applications by enhancing the flame resistant properties of these materials. Some of the end market products that benefit from our fire safety technology include plastic enclosures for consumer electronics, printed circuit boards, wire and cable, electrical connectors, textiles, foam insulation, and foam seating in furniture and automobiles. We compete in all of the markets for the major fire safety chemistries: brominated, mineral and phosphorus. Our brominated flame retardants include products such as Saytex®; our mineral-based flame retardants include products such as Martinal® and Magnifin®; and our phosphorus-based flame retardants include products such as Antiblaze® and Ncendx®. Our strategy is to have a broad range of chemistries applicable to each major flame retardant application.
Stabilizers and Curatives. We produce plastic and other additives, such as curatives, antioxidants and stabilizers, which are often specially developed and formulated for a customer’s specific manufacturing requirements. Our additives products include curatives for polyurethane, polyurea, and epoxy system polymerization. This business also produces antioxidants and stabilizers to improve the performance integrity of thermoplastic resins. We are well-positioned for global growth, notably with our leading antioxidant supplier position in the rapidly growing Chinese market.
Our Ethacure® curatives are used in cast elastomers, coatings, reaction injection molding (RIM) and specialty adhesives that are incorporated into products such as wheels, tires and rollers. Our line of Ethanox® antioxidants is used by manufacturers of polyolefins to maintain physical properties during the manufacturing process, including the color of the final product. These antioxidants are found in applications such as slit film, wire and cable, food packaging and pipes.
We also produce antioxidants used in fuels and lubricants. Our line of Ethanox® fuel and lubricant antioxidants is used by refiners and fuel marketers to extend fuel storage life and protect fuel systems, and by oil marketers and lubricant manufacturers to extend the useful life of lubricating oils, fluids and greases used in engines and various types of machinery.
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Customers
Our Polymer Solutions segment offers more than 70 products to a variety of end-markets. We sell our products mostly to chemical manufacturers and processors, such as polymer resin suppliers, lubricant manufacturers, refiners and other specialty chemical companies.
Sales of Polymer Solutions in Asia are expected to grow long-term due to the underlying growth in consumer demand and the shift of the production of consumer electronics from the United States, or U.S., and Europe to Asia. In response to this development, we have established a sales and marketing network in China, Japan, Korea and Singapore with products sourced from the U.S., Europe, China and the Middle East. We are now operating three production facilities in China to deliver polymer solutions products to this rapidly growing market.
A number of customers of our Polymer Solutions segment manufacture products for cyclical industries, including the consumer electronics, building and construction, and automotive industries. As a result, demand from our customers in such industries is also cyclical.
Competition
Our Polymer Solutions segment serves the following geographic markets: the U.S., Asia, Europe and the Middle East, each of which is highly competitive. Product performance and quality, price competition and contract terms are the primary factors in determining which qualified supplier is awarded a contract. Research and development, product and process improvements, specialized customer services, the ability to attract and retain skilled personnel, and maintenance of a good safety record have also been important factors to compete effectively in the Polymer Solutions marketplace.
Competition also arises from the substitution of different polymers and resin systems in end-products in an effort to reduce costs or change product qualities. For flame retardants, competition can be introduced from alternative chemistries, which is why our product portfolio includes bromine, mineral and phosphorus chemistries that are common in over 80% of end uses today. For other additives, competition is introduced by low-cost antioxidant suppliers. We offer our basic antioxidant products from lower cost manufacturing sites in China.
We are a market leader in the brominated flame retardants business and our most significant competitors are Chemtura Corporation and Israel Chemicals Ltd. Industrial Products division, or Israel Chemicals. We are also a market leader in the phosphorus-based flame retardants business and in the mineral-based flame retardants business. Our most significant competitors in the phosphorus-based flame retardants business are Israel Chemicals, Jiangsu Yoke Technology Co., Ltd. and Zhejiang Wansheng Chemical Co., Ltd. In our mineral-based flame retardants business, our most significant competitors include J.M. Huber Corporation, Kyowa Chemical Industry Co., Ltd. and Nabaltec GmbH. We are a market leader in the plastic additives business and our most significant competitors are BASF Corporation, Chemtura Corporation and Songwon Industrial Co., Ltd.
Raw Materials and Significant Supply Contracts
The major raw materials we use in our Polymer Solutions operations are bromine, bisphenol-A, phenol, benzene, caustic soda, phosphorus oxychloride, alumina trihydrate, polystyrene, isobutylene, and phosphorous derivatives, most of which are readily available from numerous independent suppliers and are purchased under contracts at prices we believe are competitive. The cost of raw materials is generally based on market prices although we may use contracts with price caps or other tools, as appropriate, to mitigate price volatility. Many of our customers operate under long-term supply contracts that provide for either the pass-through of raw material and energy cost changes, or pricing based on short-term “tenders” in which changing market conditions are quickly reflected in the pricing of the finished product.
The bromine we use in our Polymer Solutions segment comes from two locations: Arkansas and the Dead Sea. Our brine reserves in Arkansas are supported by an active brine rights leasing program. We believe that we have in excess of 50 years of proven bromine reserves in Arkansas. In addition, through our 50% interest in Jordan Bromine Company Limited, or JBC, a consolidated joint venture with operations in Safi, Jordan, we produce bromine from the Dead Sea, which has virtually inexhaustible reserves. In addition, we now have a joint venture with Weifang Sinobrom Import and Export Company, Ltd., or Sinobrom, in China that allows us the option to source bromine directly from China’s Shandong Province brine fields.
We entered into a range of phosphorus derivative supply agreements with Rhodia S.A. as part of the acquisition of the Rhodia polyurethane flame retardants business in 2003.
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Catalysts
Our Catalysts segment includes our refinery catalysts and polyolefin catalysts businesses.
Refinery Catalysts. Our two main refinery catalysts product lines are hydroprocessing catalysts, or HPC, and fluidized catalytic cracking, or FCC, catalysts and additives. In renewable, non-crude based fuels, we have also launched new catalysts for customers, along with ongoing research and development initiatives with additional potential customers.
HPC catalysts are primarily used to reduce the quantity of sulfur and other impurities in petroleum products as well as to convert heavy feedstock into lighter, more valuable products. FCC catalysts assist in the cracking of petroleum streams into derivative, higher-value products such as fuels and petrochemical feedstock. Our FCC additives are used to remove sulfur in gasoline and to reduce emissions of sulfur dioxide and nitrogen oxide in FCC units, to increase liquefied petroleum gas olefins yield and to boost octane in gasoline. We offer more than 90 different HPC catalysts products and more than 70 different FCC catalysts and additives products to our customers.
Polyolefin Catalysts. We manufacture aluminum- and magnesium-alkyls, which are used as co-catalysts in the production of polyolefins, elastomers, alpha olefins (such as hexene, octene and decene) and organotin heat stabilizers which are used in the preparation of organic intermediates. We also produce metallocene/single-site catalysts, which aid in the development and production of new polymers that increase impact strength, clarity and melt characteristics of plastic films. We are continuing to build on our organometallics base and to expand the portfolio of products and capabilities we offer our customers.
Customers
Our Catalysts segment customers include multinational corporations such as ExxonMobil Corporation, Royal Dutch Shell plc and Chevron Corporation; independent petroleum refining companies such as Valero Energy Corporation and Tesoro Petroleum Corporation; and national petroleum refining companies such as Saudi Aramco Mobil Refinery Company Ltd., Petróleo Brasileiro S.A. and Petróleos Mexicanos.
We estimate that there are currently approximately 450 FCC units being operated globally, each of which requires a constant supply of FCC catalysts. In addition, we estimate that there are approximately 3,000 HPC units being operated globally, each of which typically requires replacement HPC catalysts once every one to three years.
Competition
Our Catalysts segment serves the following geographic markets: the Americas, Asia, Europe and the Middle East, each of which is highly competitive. Product performance and quality, price competition and contract terms are the primary factors in determining which qualified supplier is awarded a contract. Research and development, product and process improvements, specialized customer services, the ability to attract and retain skilled personnel and the maintenance of a good safety record have also been important factors to compete effectively in the Catalysts marketplace. Through our research and development programs, we strive to differentiate our business by developing value-added products and products based on proprietary technologies.
We are a market leader in the HPC and FCC catalysts markets and our major competitors in the HPC catalysts market include Criterion Catalysts and Technologies, W.R. Grace & Co./Advanced Refining Technologies and Haldor Topsoe. Our major competitors in the FCC catalysts market include W.R. Grace & Co. and BASF Corporation. Some of our major catalysts competitors have alliances with global major refiners to facilitate new product development and introduction. Our major competitors in the polyolefin market include Akzo Nobel N.V., Chemtura Corporation, Tosoh Corporation, and W.R. Grace & Co.
Raw Materials
The major raw materials we use in our Catalysts operations include aluminum, ethylene, alpha olefins, sodium silicate, sodium aluminate, kaolin, rare earths, molybdenum, nickel and cobalt, most of which are readily available from numerous independent suppliers and are purchased or provided under contracts at prices we believe are competitive. The cost of raw materials is generally based on market prices, although we may use contracts with price caps or other tools, as appropriate, to mitigate price volatility. Certain critical raw materials may nevertheless be subject to significant volatility despite our mitigating efforts. For example, molybdenum prices averaged $29.30/lb in 2008 but significantly declined in the fourth quarter of 2008 to end the year at $9.85/lb. In 2009, prices averaged $12.05/lb and finished the year at $12.24/lb, while in 2010 prices averaged $15.77/lb and finished the year at $17.02/lb. Our profitability may be affected if we are unable to recover significant raw material costs from our customers.
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Fine Chemistry
Our Fine Chemistry (formerly Fine Chemicals) segment consists of two categories: performance chemicals and fine chemistry services and intermediates.
Performance Chemicals. Performance chemicals include products such as elemental bromine, alkyl bromides, inorganic bromides, brominated powdered activated carbon and a number of bromine fine chemicals. Our products are used in chemical synthesis, oil and gas well drilling and completion fluids, mercury control, paper manufacturing, water purification, beef and poultry processing and various other industrial applications. Other performance chemicals that we produce include tertiary amines for surfactants, biocides, disinfectants and sanitizers; potassium-based products used in industrial applications; alkenyl succinic anhydride used in paper-sizing formulations; and aluminum oxides used in a wide variety of refractory, ceramic and polishing applications. We sell these products to customers throughout the world for use in personal care products, automotive insulation, foundry bricks and other industrial products.
Fine Chemistry Services and Intermediates. In addition to supplying the specific fine chemistry products and performance chemicals for the pharmaceutical and agricultural uses described below, our fine chemistry services business offers custom manufacturing, research and chemical scale-up services for companies. We believe that these services position us to support customers in developing their new products, such as new drugs.
Our most significant pharmaceutical bulk active is ibuprofen. Ibuprofen is widely used to provide temporary pain relief and fever reduction. Bulk ibuprofen is formulated by pharmaceutical companies that sell in both the prescription and over-the-counter markets. This product competes against other painkillers, including aspirin and acetaminophen. We are one of the largest global producers of ibuprofen. We also produce a range of intermediates used in the manufacture of a variety of over-the-counter and prescription drugs.
Our agrichemicals are sold to agrichemical manufacturers and distributors that produce and distribute finished agricultural herbicides, insecticides, fungicides and soil fumigants. Our products include orthoalkylated anilines used in the acetanilide family of pre-emergent herbicides used with corn, soybeans and other crops and methyl bromide, which is used as a soil fumigant. We also manufacture and supply a variety of custom chemical intermediates for the agricultural industry.
In recent years, the market for methyl bromide has changed significantly, driven by the Montreal Protocol of 1990 and related regulation prompted by findings regarding the chemical’s potential to deplete the ozone layer. Methyl bromide is injected into the soil by end users before planting to eliminate bacteria, nematodes, fungus and weeds. Methyl bromide is used on high-value crops, such as strawberries, tomatoes, melons and peppers.
We will continue to sell methyl bromide in our current markets throughout 2011, as current regulations allow, with similar critical-use allowances compared to 2010. In accordance with the Montreal Protocol and the U.S. Clean Air Act, completion of the phase-out of methyl bromide as a fumigant in the U.S., Western Europe and Japan took effect in 2005. Methyl bromide, however, can continue to be used for “critical uses” where there are no other alternatives. Growers submit applications on a yearly basis detailing the amount of methyl bromide they will need for critical uses. Once approved by the U.S. Environmental Protection Agency, or EPA, the U.S. submits the application for approval by the parties to the Montreal Protocol. The critical use process is done annually and will continue until feasible alternatives are available. Certain other markets for methyl bromide, including quarantine and pre-shipment and chemical intermediate uses, are not restricted by the Montreal Protocol.
Customers
Our Fine Chemistry segment manufactures more than 100 products, which are used in a variety of end-markets. Sales of products and services are mostly to chemical manufacturers and processors, including pharmaceutical, agricultural, drilling and oil services, water treatment and photographic companies, and to other specialty chemical companies.
Pricing for many of our fine chemistry products and services is based upon negotiation with customers. The critical factors that affect prices are the level of technology differentiation we provide, the maturity of the product and the level of assistance required to bring a new product through a customer’s developmental process.
Competition
Our Fine Chemistry segment serves the following geographic markets: the Americas, Asia, Europe and the Middle East, each of which is highly competitive. Product performance and quality, price competition and contract terms are the primary factors in determining which qualified supplier is awarded a contract. Research and development, product and process improvements, specialized customer services, the ability to attract and retain skilled personnel and the maintenance of a good safety record have also been important factors to compete effectively in the fine chemistry marketplace.
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We are a market leader in the bromine-based products groups and primarily compete with two other integrated global bromine producers, Chemtura Corporation and Israel Chemicals. We are a leading producer of pharmaceutical bulk actives (i.e. ibuprofen and propofol) and we primarily compete with a few major Western competitors, such as BASF Corporation, Lonza, Clariant Ltd. and Cilag AG; however, there is increasing competition from Asian sources. We are seeking to differentiate ourselves from our competitors by developing new, high quality innovative products, offering cost reductions and enhancing the services that we offer.
Raw Materials
The major raw materials we use in our Fine Chemistry operations include potassium chloride, chlorine, ammonia, aluminum chloride, alpha olefins, methyl amines and propylene, most of which are readily available from numerous independent suppliers.
The bromine that we use in our Fine Chemistry segment comes from two locations: Arkansas and the Dead Sea. Our brine reserves in Arkansas are supported by an active brine rights leasing program. We believe that we have in excess of 50 years of proven bromine reserves in Arkansas. In addition, through our 50% interest in JBC, a consolidated joint venture with operations in Safi, Jordan, we produce bromine from the Dead Sea, which has virtually inexhaustible reserves. In addition, we now have our Sinobrom joint venture in China that allows us the option to source bromine directly from China’s Shandong Province brine fields.
Sales, Marketing and Distribution
We have an international strategic account program that uses cross-functional teams to serve large global customers. This program emphasizes creative strategies to improve and strengthen strategic customer relationships with emphasis on creating value for customers and promoting post-sale service. Complementing this program are regional Albemarle sales personnel around the world who serve numerous additional customers within North America, Europe, the Middle East, India, Asia Pacific, Russia, Africa and Latin America. We also use more than 60 selected distributors, commissioned sales representatives and specialists in specific market areas, some of which are subsidiaries of large chemical companies.
Research and Development
We believe that in order to generate revenue growth, maintain our margins, and remain competitive, we must continually invest in research and development, product and process improvements and specialized customer services. Through research and development, we continue to seek increased margins by introducing value-added products and proprietary processes and innovative green chemistry technologies. Our green chemistry efforts focus on the development of products that benefit society in a manner that minimizes waste and the use of raw materials and energy, avoids the use of toxic reagents and solvents and is produced in safe, environmentally friendly manufacturing processes. Green chemistry is encouraged with our researchers through periodic focus group discussions and special rewards and recognition for outstanding new green developments.
Our research and development efforts support each of our business segments. The focus of research in Polymer Solutions is divided among new and improved flame retardants, plastic and other additives and blends, and curing agents. Flame retardant research is focused primarily on developing new flame retardants which not only meet the higher performance requirements required by today’s polymer producers, formulators and original equipment manufacturers but which also have superior toxicological and environmental profiles, such as our newly introduced EarthwiseTM brand, which provides polymer solutions products that are greatly enhanced in both end product performance and environmental responsibility. Plastic and other additives research is focused primarily on developing improved capabilities to deliver commodity and value-added plastic and other additive blends to the polymer market. Curatives research is focused primarily on improving and extending our line of curing agents and formulations.
Catalysts research is focused on the needs of our refinery catalysts customers, our polyolefin catalysts customers, and the developing markets for advanced biofuels. Refinery catalysts research is focused primarily on the development of more effective catalysts and related additives to produce clean fuels and to maximize the production of the highest value refined products. In the polyolefin area, we are focused primarily on developing catalysts, co-catalysts and finished catalysts systems for polymer producers to meet the market’s demand for improved polyolefin polymers and elastomers. For biofuel production, we work closely with customers to develop sustainable and efficient liquid fuels from renewable resources, including the supply of catalysts for the production of high-performance biodiesel.
The primary focus of our Fine Chemistry research program is the development of efficient processes for the manufacture of chemical intermediates and actives for the pharmaceutical and agrichemical industries. Another area of research is the development of bromine-based products for use as biocides in industrial water treatment and food safety applications, and as additives used to reduce mercury emissions from coal-fired power plants.
We have recognized research and development expenses of $58.4 million, $60.9 million, and $67.3 million in 2010, 2009, and 2008, respectively.
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Intellectual Property
Our intellectual property, including our patents, licenses and trade names, is an important component of our business. As of December 31, 2010, we owned approximately 1,600 active U.S. and foreign patents and had approximately 1,500 pending U.S. and foreign patent applications. We also have acquired rights under the patents and inventions of others through licenses and license our patents and inventions to third parties.
Regulation
Our business is subject to a broad array of employee health and safety laws and regulations, including those under the Occupational Safety and Health Act. We also are subject to similar state laws and regulations as well as local laws and regulations for our non-U.S. operations. We devote significant resources and have developed and implemented comprehensive programs to promote the health and safety of our employees and we maintain an active health, safety and environmental program. We finished 2010 with an occupational injury and illness rate of 0.54 for Albemarle employees and nested contractors.
Our business and our customers also may be subject to significant new requirements under the European Commission’s Proposal for the Registration, Evaluation and Authorization of Chemicals, or REACH. REACH imposes obligations on European Union manufacturers and importers of chemicals and other products into the European Union to compile and file comprehensive reports, including testing data, on each chemical substance, and perform chemical safety assessments. Additionally, substances of high concern - such as Carcinogenic, Mutagenic and Reprotoxic, or CMRs; Persistent, Bioaccumulative and Toxic, or PBTs; very Persistent, very Bioaccumulative, or vPvB; and endocrine disruptors will be subject to an authorization process. Authorization may result in restrictions in the use of products by application or even banning the product. In 2009, one of our products was designated by European regulators as a substance of very high concern under authorization, Hexabromocyclododecane, or HBCD. Our sales of HBCD approximate 1% of our total annual net sales.
The REACH regulations impose significant additional burdens on chemical producers, importers, downstream users of chemical substances and preparations, and the entire supply chain. Our significant manufacturing presence and sales activities in the European Union will require us to incur significant additional compliance costs and may result in increases in the costs of raw materials we purchase and the products we sell. Increases in the costs of our products could result in a decrease in their overall demand; additionally, customers may seek products that are not regulated by REACH, which could also result in a decrease in the demand of certain of our products subject to the REACH regulations.
Recently, there has been increased scrutiny by regulatory authorities, legislative bodies and environmental interest groups in various countries in the world of certain brominated flame retardants. We manufacture a broad range of brominated flame retardant products, which are used in a variety of applications. Concern about the impact of some of our products on human health or the environment may lead to regulation or reaction in our markets, independent of regulation. For example, in 2009 the state of Vermont passed a law that bans the use of decabromodiphenyl ether as a flame retardant in mattresses and upholstered furniture after July 1, 2010, and in televisions and computers after July 1, 2012. The state of Oregon also passed a ban on the use of decabromodiphenyl ether as a flame retardant after January 1, 2011. In 2010, the state of Maine broadened existing restrictions on the use of decabromodiphenyl ether to include its use in plastic pallets, effective January 1, 2012. Also, the European Union’s existing restrictions on the use of decabromodiphenyl ether in electrical and electronic equipment have been copied by the Republic of India and are likely to be adopted in the People’s Republic of China as well. In December 2009, we, along with other leading producers announced a voluntary withdrawal, in cooperation with the EPA, from the production and sale of decabromodiphenyl ether in the U.S. over a period of three to four years. A similar agreement was reached later with Canada. Bills to restrict or ban the use of decabromodiphenyl ether are still under consideration in several U.S. states.
Environmental Regulation
We are subject to numerous foreign, federal, state and local environmental laws and regulations, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated properties. Ongoing compliance with such laws and regulations is an important consideration for us. Key aspects of our operations are subject to these laws and regulations. In addition, we incur substantial capital and operating costs in our efforts to comply with them.
Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages, or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities also may be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at
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the affected property, as well as entities that currently own or operate such property. We are subject to such laws, including the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as CERCLA or Superfund, in the U.S., and similar foreign and state laws. We may have liability as a potentially responsible party, or PRP, with respect to active off-site locations under CERCLA or state equivalents. We have sought to resolve our liability as a PRP at these sites through indemnification by third parties and settlements, which would provide for payment of our allocable share of remediation costs. Because the clean-up costs are estimates and are subject to revision as more information becomes available about the extent of remediation required, and in some cases we have asserted a defense to any liability, our estimates could change. Moreover, liability under the CERCLA and equivalent state statutes may be joint and several, meaning that we could be required to pay in excess of our pro rata share of remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in estimating our liabilities. Accruals for these matters are included in the environmental reserve discussed above. Our management is actively involved in evaluating environmental matters and, based on information currently available to us, we have concluded that our outstanding environmental liabilities for unresolved waste sites currently known to us should not have a material effect on our operations.
We use and generate hazardous substances and wastes in our operations and may become subject to claims for personal injury and/or property damage relating to the release of such substances into the environment. In addition, some of our current properties are, or have been, used for industrial purposes, which could contain currently unknown contamination that could expose us to governmental requirements or claims relating to environmental remediation, personal injury, and/or property damage. While we conduct our operations so as to minimize the risk of incurring such losses, the nature of our business and the types of operations in which we engage create a potential for such losses to occur. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of production, pollution and other environmental damages. Depending on the frequency and severity of such incidents, it is possible that the Company’s operating costs, insurability and relationships with customers, employees and regulators could be impaired. In particular, our customers may elect not to purchase our product if they view our safety record as unacceptable. This could also cause us to lose customers and substantial revenues. However, we believe that the likelihood of an environmental-related catastrophic occurrence or a series of occurrences that could materially affect the Company’s financial position or competitiveness is low.
We record accruals for environmental and asset retirement obligation matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. It is possible that new information or future developments could require us to reassess our potential exposure related to environmental matters. We may incur significant costs and liabilities in order to comply with existing environmental laws and regulations. It is also possible that other developments, such as increasingly strict environmental laws, regulations and orders of regulatory agencies, as well as claims for damages to property and the environment or injuries to employees and other persons resulting from our current or past operations, could result in substantial costs and liabilities in the future. As this information becomes available, or other relevant developments occur, we will adjust our accrual amounts accordingly. While there are still uncertainties related to the ultimate costs we may incur, based upon our evaluation and experience to date, we believe our reserves are adequate. We cannot assure you that, as a result of former, current or future operations, there will not be some future impact on us relating to new regulations or additional environmental remediation or restoration liabilities. See “Safety and Environmental Matters” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 45.
Climate Change
The growing concerns about climate change and the related imposition by governments of more stringent regulations may provide us with new or expanded business opportunities. Our Catalysts segment seeks to capitalize on the “green revolution” by providing solutions to companies pursuing alternative fuel products and technologies, such as biofuels, gas-to-liquids, and others. As demand for, and legislation mandating or incentivizing the use of, alternative fuels and alternative fuel technologies that limit or eliminate greenhouse gas emissions increase, we continue to invest in, and expand our product offerings of, alternative fuel technologies. As a result of the investments in alternative fuel technology products and services to date and our continued focus on these growth areas, we believe we are well positioned to take advantage of opportunities that may arise if new legislation is enacted. See also page 14 for further discussion on climate change in Item 1A. Risk Factors.
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Recent Acquisitions and Joint Ventures
Over the last three years, we have devoted resources to acquisitions and joint ventures, including the subsequent integration of acquired businesses. These acquisitions and joint ventures have expanded our base business, provided our customers with a wider array of products and presented new alternatives for discovery through additional chemistries. Following is a summary of our acquisitions and joint ventures during the last three years.
On December 6, 2010, we announced that we had signed a memorandum of understanding to build a world scale HPC production plant on the site of our existing joint venture Fábrica Carioca de Catalisadores SA (FCC SA) in Santa Cruz, Brazil with Petrobras. The new facility will complement existing production of FCC catalysts. We are also further enhancing our partnership with Petrobras by engaging in a joint technical cooperation aimed at the further development of advanced HPC products, mirroring our very successful existing cooperation in the area of FCC catalysts.
On September 13, 2010, we announced the purchase of certain property and equipment in Yeosu, South Korea in connection with our plans for building a metallocene polyolefin catalyst and trimethyl gallium (TMG) manufacturing site. The site will effectively mirror Albemarle’s world scale metallocene polyolefin catalyst and TMG capabilities located in Baton Rouge, Louisiana.
On October 27, 2009, we entered into an agreement with Ibn Hayyan Plastic Products Company (TAYF), an affiliate of Saudi Basic Industries Corporation (SABIC), to form a joint venture called Saudi Organometallic Chemicals Company (SOCC). Under the terms of the joint venture agreement, the two parent companies will build a world-scale organometallics production facility strategically located in the Arabian gulf industrial city of Al-Jubail. Start-up of this facility is anticipated by the second half of 2012.
On December 5, 2008, we reached agreement with Weifang Sinobrom Import and Export Company, Ltd. to form a new Fine Chemistry joint venture that combined the existing business of Sinobrom, a leading marketer of bromine derivatives in China, with our global bromine expertise across the world. The new joint venture, Sinobrom Albemarle Bromine Chemicals (Shandong) Company Ltd., is 75% owned by us and creates new growth platforms for us in Shandong province, the heart of the Chinese bromine and derivatives market.
Effective July 31, 2008, we acquired Sorbent Technologies Corporation, a full-service power plant mercury-control provider, for approximately $22.4 million. This acquisition broadened our current bromine offerings and allowed us to bring innovative, low-cost turnkey solutions to utilities and other bromine-based mercury solutions providers in the industry while complementing our existing green solutions portfolio and our ongoing mission to provide innovative and viable clean energy products and services to the marketplace.
On June 30, 2008, we acquired the remaining 25% interests in our two antioxidant joint ventures in China (Ningbo Jinhai Albemarle Chemical and Industry Company Limited and Shanghai Jinhai Albemarle Fine Chemicals Company Limited) for approximately $19.9 million, resulting in our 100% ownership of each of these Polymer Solutions segment joint ventures.
Employees
As of December 31, 2010, we had 4,020 employees of whom 2,055, or 51%, are employed in the U.S.; 1,125, or 28%, are employed in Europe; 590, or 15%, are employed in Asia and 250, or 6%, are employed in the Middle East. Approximately 18% of our U.S. employees are unionized. We have bargaining agreements at three of our U.S. locations:
| • | Baton Rouge, Louisiana—United Steel Workers (USW); |
| • | Orangeburg, South Carolina—International Brotherhood of Teamsters-Industrial Trades Division (IBT); and |
| • | Pasadena, Texas—United Steel Workers (USW); Sheet Metal Workers International Association (SMWIA); United Association of Journeymen & Apprentices of Plumbing and Pipefitting Industry (UAJAPPI); and International Brotherhood of Electrical Workers (IBEW). |
We believe that we have good working relationships with these unions, and we have operated without a labor work stoppage at each of these locations for more than 17 years. Bargaining agreements expire at our Pasadena, Texas location in 2011, our Baton Rouge, Louisiana location in 2012, and at our Orangeburg, South Carolina location in 2013.
We have two works councils representing the majority of our European sites—Amsterdam, the Netherlands and Bergheim, Germany—covering approximately 910 employees. In addition, we have approximately 50 employees at our manufacturing facility in Avonmouth, United Kingdom that are represented by unions through a current collective bargaining agreement. We believe that we have a generally good relationship with these councils and bargaining representatives. In September 2009, we entered into consultation processes under local laws at our Amsterdam and Bergheim locations for restructuring programs that included planned reductions in force. During the fourth quarter of 2009, approximately $1.6 million in related charges were recorded for our Amsterdam restructuring program. During the first quarter of 2010, we recorded approximately $6.6 million in charges associated with the program at our Bergheim location.
Available Information
Our internet website address is http://www.albemarle.com. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or
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furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as reports on Forms 3, 4 and 5 filed pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC. These reports may also be obtained at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Albemarle.
Our Corporate Governance Guidelines, Code of Business Conduct and the charters of the Audit, Health Safety and Environmental, Executive Compensation, and Nominating and Governance Committees are also available on our website and are available in print to any shareholder upon request by writing to Investor Relations, 451 Florida Street, Baton Rouge, Louisiana 70801, or by calling (225) 388-7654.
| Item 1A. | Risk Factors. |
You should consider carefully the following risks when reading the information, including the financial information, contained in this Annual Report on Form 10-K.
Adverse conditions in the global economy and volatility and disruption of financial markets can negatively impact our customers and suppliers and therefore have a material adverse effect on our results of operations.
A global economic downturn may reduce customer demand or inhibit our ability to produce our products, negatively impacting our operating results. Our business and operating results have been and will continue to be sensitive to global economic downturns, including credit market tightness which can impact our liquidity as well as our customers and suppliers, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that can affect the global economy. Our customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing or potential customers can delay or cancel plans to purchase products and may not be able to fulfill their obligations in a timely fashion. Further, suppliers may be experiencing similar conditions, which could impact their ability to fulfill their obligations to us. If a global recession continues for significant future periods or deteriorates significantly, our results of operations, financial condition and cash flows could be materially adversely affected.
Our inability to pass through increases in costs and expenses for raw materials and energy, on a timely basis or at all, could have a material adverse effect on the margins of our products.
Our raw material and energy costs can be volatile and may increase significantly. Increases are primarily driven by significantly tighter market conditions and major increases in pricing of basic building blocks for our products such as crude oil, chlorine and metals, including molybdenum, which is used in the refinery catalysts business. We generally attempt to pass changes in the prices of raw materials and energy to our customers, but we may be unable to or be delayed in doing so. Our inability to pass through price increases or any limitation or delay in our passing through price increases could adversely affect our margins. In addition to raising prices, raw material suppliers may extend lead times or limit supplies. Constraints on the supply or delivery of critical raw materials could disrupt production and adversely affect the performance of our business.
We face competition from other specialty chemical companies, which places downward pressure on the prices and margins of our products.
We operate in a highly competitive marketplace, competing against a number of domestic and foreign specialty chemical producers. Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service. Some of our competitors are larger than we are and may have greater financial resources. These competitors may also be able to maintain significantly greater operating and financial flexibility than we do. As a result, these competitors may be better able to withstand changes in conditions within our industry, changes in the prices of raw materials and energy and in general economic conditions. Additionally, competitors’ pricing decisions could compel us to decrease our prices, which could affect our margins and profitability adversely. Our ability to maintain or increase our profitability is, and will continue to be, dependent upon our ability to offset decreases in the prices and margins of our products by improving production efficiency and volume, shifting to higher margin chemical products and improving existing products through innovation and research and development. If we are unable to do so or to otherwise maintain our competitive position, we could lose market share to our competitors.
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Downturns in our customers’ cyclical industries could adversely affect our sales and profitability.
Downturns in the businesses that use our specialty chemicals will adversely affect our sales. Many of our customers are in industries, including the electronics, building and construction, and automotive industries, that are cyclical in nature and sensitive to changes in general economic conditions. Historically, downturns in general economic conditions have resulted in diminished product demand, excess manufacturing capacity and lower average selling prices, and we may experience similar problems in the future. A decline in economic conditions in our customers’ cyclical industries may have a material adverse effect on our sales and profitability.
Our results are subject to fluctuation because of irregularities in the demand for our HPC catalysts and certain of our agrichemicals.
Our HPC catalysts are used by petroleum refiners in their processing units to reduce the quantity of sulfur and other impurities in petroleum products. The effectiveness of HPC catalysts diminishes with use, requiring the HPC catalysts to be replaced, on average, once every one to three years. The sales of our HPC catalysts, therefore, are largely dependent on the useful life cycle of the HPC catalysts in the processing units and may vary materially by quarter. In addition, the timing and profitability of HPC catalysts sales can have a significant impact on revenue and profit in any one quarter. Sales of our agrichemicals are also subject to fluctuation as demand varies depending on climate and other environmental conditions, which may prevent farming for extended periods. In addition, crop pricing and timing of when farms alternate from one crop to another crop in a particular year can also alter sales of agrichemicals.
Changes in our customers’ products can reduce the demand for our specialty chemicals.
Our customers use our specialty chemicals for a broad range of applications. Changes in our customers’ products or processes may enable our customers to reduce consumption of the specialty chemicals that we produce or make our specialty chemicals unnecessary. Customers may also find alternative materials or processes that no longer require our products. For example, many of our flame retardants are incorporated into resin systems to enhance the flame retardancy of a particular polymer. Should a customer decide to use a different polymer due to price, performance or other considerations, we may not be able to supply a product that meets the customer’s new requirements. Consequently, it is important that we develop new products to replace the sales of products that mature and decline in use. Our business, results of operations, cash flows and margins could be materially adversely affected if we are unable to manage successfully the maturation of our existing products and the introduction of new products.
Our research and development efforts may not succeed and our competitors may develop more effective or successful products.
The specialty chemicals industry is subject to periodic technological change and ongoing product improvements. In order to maintain our margins and remain competitive, we must successfully develop, manufacture and market new or improved products. As a result, we must commit substantial resources each year to research and development. Ongoing investments in research and development for future products could result in higher costs without a proportional increase in revenues. Additionally, for any new product program, there is a risk of technical or market failure in which case we may not be able to develop the new commercial products needed to maintain our competitive position or we may need to commit additional resources to new product development programs. Moreover, new products may have lower margins than the products they replace.
We also expect competition to increase as our competitors develop and introduce new and enhanced products. For example, our Fine Chemistry segment is experiencing increased competition from large-scale producers of pharmachemicals, particularly from Asian sources. In our Catalysts segment, our petroleum refinery customers are processing crude oil feedstocks of declining quality, while at the same time operating under increasingly stringent regulations requiring the gasoline, diesel and other fuels they produce to contain fewer impurities, including sulfur. As a result, our petroleum refining customers are demanding more effective and more cost-effective catalysts products. As new products enter the market, our products may become obsolete or competitors’ products may be marketed more effectively than our products. If we fail to develop new products, maintain or improve our margins with our new products or keep pace with technological developments, our business, financial condition, results of operations and cash flows will suffer.
Our inability to protect our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
Protection of our proprietary processes, methods and compounds and other technology is important to our business. We generally rely on patent, trade secret, trademark and copyright laws of the U.S. and certain other countries in which our products are produced or sold, as well as licenses and nondisclosure and confidentiality agreements, to protect our intellectual property rights. The patent, trade secret, trademark and copyright laws of some countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Failure to protect our intellectual property rights may result in the loss of valuable proprietary technologies. Additionally, some of our technologies are not covered by any patent or patent application and, even if a patent application has been filed, it may not result in an issued patent. If patents are issued to us, those patents may not provide meaningful protection against competitors or
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against competitive technologies. We cannot assure you that our intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable.
We could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits. We may not prevail in any intellectual property litigation and such litigation may result in significant legal costs or otherwise impede our ability to produce and distribute key products.
We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, we cannot assure you that our confidentiality agreements will not be breached, that they will provide meaningful protection for our trade secrets and proprietary manufacturing expertise or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets or manufacturing expertise.
Our substantial international operations subject us to risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.
We conduct a substantial portion of our business outside of the U.S. We and our joint ventures currently have over 30 facilities located outside the U.S., including facilities and offices located in Austria, Australia, Belgium, Brazil, France, Germany, Hungary, India, Italy, Japan, Jordan, Korea, the Netherlands, the People’s Republic of China, Russia, Saudi Arabia, Singapore, United Arab Emirates and the United Kingdom. We expect sales from international markets to continue to represent a significant portion of our net sales and the net sales of our joint ventures. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following:
| • | fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. Dollars of products and services we provide in international markets where payment for our products and services is made in the local currency; |
| • | transportation and other shipping costs may increase; |
| • | intellectual property rights may be more difficult to enforce; |
| • | foreign countries with their diverse legislative and regulatory structures in various jurisdictions may unexpectedly increase the rate at which our income is taxed, impose additional withholding taxes or otherwise tax our income; |
| • | foreign countries may adopt other restrictions on foreign trade or investment, including currency exchange controls; |
| • | trade sanctions could result in losing access to customers and suppliers in those countries; |
| • | unexpected adverse changes in foreign laws or regulatory requirements may occur; |
| • | agreements may be difficult to enforce and receivables difficult to collect; |
| • | compliance with a variety of foreign laws and regulations may be burdensome; |
| • | unexpected adverse changes in export duties, quotas and tariffs and difficulties in obtaining export licenses; |
| • | general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries; |
| • | foreign operations may experience staffing difficulties and labor disputes; |
| • | foreign governments may nationalize private enterprises; and |
| • | our business and profitability in a particular country could be affected by political or economic repercussions on a domestic, country specific or global level from terrorist activities and the response to such activities. |
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In addition, certain of our joint ventures operate, and we have ongoing capital projects in, high-risk regions of the world such as the Middle East and South America. Unanticipated events, such as geopolitical changes, could result in a write-down of our investment in the affected joint venture, a delay or cancellation of those capital projects and negatively impact our future growth and profitability. Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we and our joint ventures do business.
We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and net income.
We conduct our business and incur costs in the local currency of most of the countries in which we operate. The financial condition and results of operations of each foreign operating subsidiary and joint venture are reported in the relevant local currency and then translated to U.S. Dollars at the applicable currency exchange rate for inclusion in our consolidated financial statements. Changes in exchange rates between these foreign currencies and the U.S. Dollar will affect the recorded levels of our assets, liabilities, net sales, cost of goods sold and operating margins and could result in exchange losses. The primary currencies to which we have exposure are the European Union Euro, Japanese Yen, British Pound Sterling, Korean Won, Chinese Renminbi and the U.S. Dollar (in certain of our foreign locations). Exchange rates between these currencies and the U.S. Dollar in recent years have fluctuated significantly and may do so in the future. Significant changes in these foreign currencies relative to the U.S. Dollar could also have an adverse effect on our ability to meet interest and principal payments on any foreign currency-denominated debt outstanding. In addition to currency translation risks, we incur currency transaction risks whenever one of our operating subsidiaries or joint ventures enters into either a purchase or a sales transaction using a different currency from its functional currency. Our operating results and net income may be affected by any volatility in currency exchange rates and our ability to manage effectively our currency transaction and translation risks.
We incur substantial costs in order to comply with extensive environmental, health and safety laws and regulations.
In the jurisdictions in which we operate, we are subject to numerous federal, state and local environmental, health and safety laws and regulations, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated properties. Ongoing compliance with such laws and regulations is an important consideration for us and we incur substantial capital and operating costs in our compliance efforts. Environmental laws have become increasingly strict in recent years. We expect this trend to continue and anticipate that compliance will continue to require increased capital expenditures and operating costs.
Violations of environmental, health and safety laws and regulations may subject us to fines, penalties and other liabilities and may require us to change certain business practices or curtail production.
If we violate environmental, health and safety laws or regulations, in addition to being required to correct such violations, we can be held liable in administrative, civil or criminal proceedings for substantial fines and other sanctions could be imposed that could disrupt or limit our operations. Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities may also be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. Such liabilities can be difficult to identify and the extent of any such liabilities can be difficult to predict. We use, and in the past have used, hazardous substances at many of our facilities, and we have in the past, and may in the future, be subject to claims relating to exposure to hazardous materials and the associated liabilities may be material. We also have generated, and continue to generate, hazardous wastes at a number of our facilities. Some of our facilities also have lengthy histories of manufacturing or other activities that have resulted in site contamination. We have also given contractual indemnities for environmental conditions relating to facilities we no longer own or operate. The nature of our business, including historical operations at our current and former facilities, exposes us to risks of liability under these laws and regulations due to the production, storage, use, transportation and sale of materials that can cause contamination or personal injury if released into the environment. Additional information may arise in the future concerning the nature or extent of our liability with respect to identified sites, and additional sites may be identified for which we are alleged to be liable, that could cause us to materially increase our environmental accrual or the upper range of the costs we believe we could reasonably incur for such matters.
We may be exposed to certain regulatory and financial risks related to climate change.
Growing concerns about climate change may result in the imposition of additional environmental regulations to which we may become subject. Potentially, some form of U.S. federal regulation is forthcoming with respect to greenhouse gas emissions (including carbon dioxide (CO2)) and/or “cap and trade” legislation. Additionally, some of our operations are within other jurisdictions that
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have, or are developing, regulatory regimes governing greenhouse gas emissions. For example, we have operations in the European Union, Brazil, China, Japan, Jordan, Saudi Arabia, Singapore and the United Arab Emirates, which have implemented measures to achieve objectives under the Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change which set binding targets for reducing greenhouse gas emissions. The first commitment period under the Kyoto Protocol is set to expire in 2012 and global attention is focused on the development of a successor global policy framework. The outcome of new legislation in the U.S. and other jurisdictions in which we operate may result in new or additional regulation, additional charges to fund energy efficiency activities or other regulatory actions. While certain climate change initiatives may result in new business opportunities for us in the area of alternative fuel technologies, compliance with these initiatives may also result in additional costs to us, including, among other things, increased production costs or additional taxes or reduced emission allowances. We may not be able to recover the cost of compliance with new or more stringent environmental laws and regulations through our contractual terms, which could adversely affect our business and negatively impact our growth. Furthermore, the potential impacts of climate change and related regulation on our customers are highly uncertain and may adversely affect our operations.
Contractual indemnities may be ineffective in protecting us from environmental liabilities.
At several of our properties where hazardous substances are known to exist (including some sites where hazardous substances are being investigated or remediated), we believe we are entitled to contractual indemnification from one or more former owners or operators; however, in the event we make a claim, the indemnifier may disagree with us or not have the financial capacity to fulfill its indemnity obligation. If our contractual indemnity is not upheld or effective, our accrual and/or our costs for the investigation and cleanup of hazardous substances could increase materially.
Regulation, or the threat of regulation, of some of our products could have an adverse effect on our sales and profitability.
We manufacture or market a number of products that are or have been the subject of attention by regulatory authorities and environmental interest groups. For example, for many years we have marketed methyl bromide, a chemical that is particularly effective as a soil fumigant. In recent years, the market for methyl bromide has changed significantly, driven by the Montreal Protocol of 1990 and related regulation prompted by findings regarding the chemical’s potential to deplete the ozone layer. Completion of the phase-out of methyl bromide as a fumigant took effect January 1, 2005 with continued use for critical uses allowed on an annual basis until feasible alternatives are available.
Recently, there has been increased scrutiny by regulatory authorities, legislative bodies and environmental interest groups in various countries in the world of certain brominated flame retardants. We manufacture a broad range of brominated flame retardant products, which are used in a variety of applications. Concern about the impact of some of our products on human health or the environment may lead to regulation, or reaction in our markets independent of regulation, that could reduce or eliminate markets for such products.
The only brominated flame retardant that we currently sell that has been banned for specified applications to date is decabromodiphenyl ether, which was banned for some applications in the states of Washington, Maine, Oregon and Vermont. In 2009, the state of Vermont passed a law that bans the use of decabromodiphenyl ether as a flame retardant in mattresses and upholstered furniture after July 1, 2010, and in televisions and computers after July 1, 2012. The state of Oregon also passed a ban on the use of decabromodiphenyl ether as a flame retardant after January 1, 2011. In December 2009, we, along with other leading producers announced a voluntary withdrawal, in cooperation with the EPA, from the production and sale of decabromodiphenyl ether in the U.S. over a period of three to four years. A similar agreement was reached later with Canada. Bills to restrict or ban the use of decabromodiphenyl ether are still under consideration in several U.S. states.
Norway restricted decabromodiphenyl ether in April 2008, except for certain transportation applications. On April 1, 2008, the European Court of Justice annulled the exemption of decabromodiphenyl ether from the RoHS Directive, ruling that the European Commission had followed an incorrect procedure when adopting the exemption. As a consequence, the use of decabromodiphenyl ether in electrical and electronic equipment was banned in the European Union effective July 1, 2008. In 2010, the Republic of India decided to adopt similar legislation, effective January 1, 2012. In 2010, approximately 1% of our net sales were derived from decabromodiphenyl ether. None of these legislative restrictions has caused or is expected to cause a significant adverse effect on our profitability.
Additionally, agencies in the European Union continue to evaluate the risks to human health and the environment associated with certain brominated flame retardants, including decabromodiphenyl ether, hexabromocyclododecane and tetrabromobisphenol A. We manufacture each of these brominated flame retardants. In 2009, the United Nations’ UNECE agency decided that hexabromocyclododecane meets the technical requirements to be considered a “persistent organic pollutant,” or POP. Additional evaluations will be conducted before any action is taken against the sale of hexabromocyclododecane. Our expectation is that the sale of hexabromocyclododecane could be banned in Europe as soon as 2014.
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Additional government regulations, including limitations or bans on the use of brominated flame retardants, would likely result in a decline in our net sales of brominated flame retardants and have an adverse effect on our sales and profitability. In addition, the threat of additional regulation or concern about the impact of brominated flame retardants on human health or the environment could lead to a negative reaction in our markets that could reduce or eliminate our markets for these products, which could have an adverse effect on our sales and profitability.
We could be subject to damages based on claims brought against us by our customers or lose customers as a result of the failure of our products to meet certain quality specifications.
Our products provide important performance attributes to our customers’ products. If a product fails to perform in a manner consistent with quality specifications or has a shorter useful life than guaranteed, a customer could seek replacement of the product or damages for costs incurred as a result of the product failing to perform as guaranteed. These risks apply to our refinery catalysts in particular because, in certain instances, we sell our refinery catalysts under agreements that contain limited performance and life cycle guarantees. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.
Our business is subject to hazards common to chemical businesses, any of which could interrupt our production and adversely affect our results of operations.
Our business is subject to hazards common to chemical manufacturing, storage, handling and transportation, including explosions, fires, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases and other risks. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination. In addition, the occurrence of material operating problems at our facilities due to any of these hazards may diminish our ability to meet our output goals. Accordingly, these hazards, and their consequences could have a material adverse effect on our operations as a whole, including our results of operations and cash flows, both during and after the period of operational difficulties.
Weather-related matters could impact our results of operations.
In 2005 and again in the third quarter of 2008, major hurricanes caused significant disruption to the operations on the U.S. Gulf Coast for many of our customers and our suppliers of certain raw materials, which had an adverse impact on volume and cost for some of our products. If similar weather-related matters occur in the future, they could negatively affect our ability to operate, and the results of operations, at our sites in this region.
The insurance that we maintain may not fully cover all potential exposures.
We maintain property, business interruption and casualty insurance but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies, including liabilities for environmental remediation. In addition, from time to time, various types of insurance for companies in the specialty chemical industry have not been available on commercially acceptable terms or, in some cases, have not been available at all. We are potentially at risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
We may incur significant charges in the event we close or divest all or part of a manufacturing plant or facility.
We periodically assess our manufacturing operations in order to manufacture and distribute our products in the most efficient manner. Based on our assessments, we may make capital improvements to modernize certain units, move manufacturing or distribution capabilities from one plant or facility to another plant or facility, discontinue manufacturing or distributing certain products or close or divest all or part of a manufacturing plant or facility. We also have shared services agreements at several of our plants and if such agreements are terminated or revised, we would assess and potentially adjust our manufacturing operations. The closure or divestiture of all or part of a manufacturing plant or facility could result in future charges that could be significant.
If we are unable to retain key personnel or attract new skilled personnel, it could have an adverse effect on our business.
The unanticipated departure of any key member of our management team could have an adverse effect on our business. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and on our ability to attract and retain, qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.
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Some of our employees are unionized, represented by workers’ councils or are employed subject to local laws that are less favorable to employers than the laws of the U.S.
As of December 31, 2010, we had 4,020 employees. Approximately 18% of our 2,055 U.S. employees are unionized. Our collective bargaining agreements expire in 2011, 2012 and 2013. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by workers’ councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure our workforce. Although we believe that we have a good working relationship with our employees, a strike, work stoppage or slowdown by our employees or significant dispute with our employees could result in a significant disruption of our operations or higher ongoing labor costs.
Our joint ventures may not operate according to their business plans if our partners fail to fulfill their obligations, which may adversely affect our results of operations and may force us to dedicate additional resources to these joint ventures.
We currently participate in a number of joint ventures and may enter into additional joint ventures in the future. The nature of a joint venture requires us to share control with unaffiliated third parties. If our joint venture partners do not fulfill their obligations, the affected joint venture may not be able to operate according to its business plan. In that case, our results of operations may be adversely affected and we may be required to increase the level of our commitment to the joint venture. Also, differences in views among joint venture participants may result in delayed decisions or failures to agree on major issues. If these differences cause the joint ventures to deviate from their business plans, our results of operations could be adversely affected.
We may not be able to consummate future acquisitions or integrate future acquisitions into our business, which could result in unanticipated expenses and losses.
As part of our business growth strategy, we have acquired businesses and entered into joint ventures in the past and intend to pursue acquisitions and joint venture opportunities in the future. Our ability to implement this component of our growth strategy will be limited by our ability to identify appropriate acquisition or joint venture candidates and our financial resources, including available cash and borrowing capacity. The expense incurred in consummating acquisitions or entering into joint ventures, the time it takes to integrate an acquisition or our failure to integrate businesses successfully, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from acquisitions or joint ventures.
The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with the integration of acquisitions include:
| • | potential disruption of our ongoing business and distraction of management; |
| • | unforeseen claims and liabilities, including unexpected environmental exposures; |
| • | unforeseen adjustments, charges and write-offs; |
| • | problems enforcing the indemnification obligations of sellers of businesses or joint venture partners for claims and liabilities; |
| • | unexpected losses of customers of, or suppliers to, the acquired business; |
| • | difficulty in conforming the acquired businesses’ standards, processes, procedures and controls with our operations; |
| • | variability in financial information arising from the implementation of purchase price accounting; |
| • | inability to coordinate new product and process development; |
| • | loss of senior managers and other critical personnel and problems with new labor unions; and |
| • | challenges arising from the increased scope, geographic diversity and complexity of our operations. |
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Although our pension plans currently meet minimum funding requirements, events could occur that would require us to make significant contributions to the plans and reduce the cash available for our business.
We have several defined benefit pension plans around the world, including in the U.S., the Netherlands, Germany, Belgium, and Japan, covering most of our employees. The U.S. plans represent approximately 93% of the total liabilities of the plans worldwide. We are required to make cash contributions to our pension plans to the extent necessary to comply with minimum funding requirements imposed by the various countries’ benefit and tax laws. The amount of any such required contributions will be determined annually based on an actuarial valuation of the plans as performed by the plans’ actuaries.
During 2010, we made $70.0 million of voluntary contributions to our U.S. qualified defined benefit pension plans. Also, in January 2011, we made another voluntary contribution of $50.0 million to these plans. We anticipate that the funded status of each of our U.S. qualified defined benefit pension plans will be at least 80% in 2011 and, therefore, the plans should not be subject to benefit limitations in conjunction with the Pension Protection Act of 2006. Additional voluntary pension contributions in and after 2011 may vary depending on factors such as asset returns, then-current interest rates, and legislative changes. The amounts we may elect or be required to contribute to our pension plans in the future may increase significantly. These contributions could be substantial and would reduce the cash available for our business.
The occurrence or threat of extraordinary events, including domestic and international terrorist attacks, may disrupt our operations and decrease demand for our products.
Chemical-related assets may be at greater risk of future terrorist attacks than other possible targets in the U.S. and throughout the world. As an American Chemistry Council member company, we have completed vulnerability assessments of our U.S. manufacturing locations and meet the requirements of this industry standard. We have a corporate security standard and audit our facilities for compliance. Recent investments have been made to upgrade site security. However, federal legislation is under consideration that could impose new site security requirements, specifically on chemical manufacturing facilities, which may increase our overhead expenses.
New federal regulations have already been adopted to increase the security of the transportation of hazardous chemicals in the U.S. We believe we have met these requirements but additional federal and local regulations that limit the distribution of hazardous materials are being considered. We ship and receive materials that are classified as hazardous. Bans on movement of hazardous materials through cities like Washington, D.C. could affect the efficiency of our logistical operations. Broader restrictions on hazardous material movements could lead to additional investment to produce hazardous raw materials and change where and what products we manufacture.
The occurrence of extraordinary events, including future terrorist attacks and the outbreak or escalation of hostilities, cannot be predicted, and their occurrence can be expected to continue to negatively affect the economy in general and specifically the markets for our products. The resulting damage from a direct attack on our assets, or assets used by us, could include loss of life and property damage. In addition, available insurance coverage may not be sufficient to cover all of the damage incurred or, if available, may be prohibitively expensive.
We will need a significant amount of cash to service our indebtedness and our ability to generate cash depends on many factors beyond our control.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on a range of economic, competitive and business factors, many of which are outside our control. Based on a weighted average interest rate of 4.4% and outstanding borrowings at December 31, 2010 of $860.9 million, our annual interest expense would be approximately $37.5 million. A hypothetical 10% change (approximately 23 basis points) in the average interest rate applicable to the variable portion of such borrowings would change our annualized interest expense by approximately $0.3 million. Our business may not generate sufficient cash flow from operations to service our debt obligations. If we are unable to service our debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, reduce or delay capital expenditures, sell assets or raise additional equity. We may not be able to refinance any of our indebtedness, sell assets or raise additional equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, could have a material adverse effect on our business and financial condition.
Conditions in the global credit markets have improved markedly over the past 12 months. Nevertheless, more stringent credit standards and heightened uncertainty regarding the impact of prospective regulatory changes regarding capitalization and other requirements on major financial institutions are factors likely to prevent us from obtaining terms comparable to those prevalent prior to the recent global recession. As of December 31, 2010 we had no significant obligations maturing before 2013. Availability under existing committed credit facilities is expected to be sufficient for our working capital and capital expenditure needs.
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Restrictive covenants in our debt instruments may adversely affect our business.
Our March 2007 credit agreement and the indentures governing our senior notes contain select restrictive covenants. These covenants provide constraints on our financial flexibility. The failure to comply with the covenants in our March 2007 credit agreement, the indentures governing the senior notes and the agreements governing other indebtedness, including indebtedness incurred in the future, could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. See “Financial Condition and Liquidity—Long-Term Debt” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 43.
A downgrade of the ratings on our debt or an increase in interest rates will cause our debt service obligations to increase.
Borrowings under our March 2007 credit agreement bear interest at floating rates. The rates are subject to adjustment based on the ratings of our senior unsecured long-term debt by Standard & Poor’s Ratings Services, or S&P and Moody’s Investors Services, or Moody’s. S&P has rated our senior unsecured long-term debt as BBB and Moody’s has rated our senior unsecured long-term debt as Baa1. S&P and/or Moody’s may, in the future, downgrade our ratings. The downgrading of our ratings or an increase in benchmark interest rates would result in an increase of our interest expense on borrowings under our March 2007 credit agreement. In addition, the downgrading of our ratings could adversely affect our future ability to obtain funding and/or materially increase the cost of any additional funding.
Changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and the market price of our securities.
Credit rating agencies rate our debt securities on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading, or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our debt securities or placing us on a watch list for possible future downgrading would likely increase our cost of financing, limit our access to the capital markets and have an adverse effect on the market price of our securities.
Because a significant portion of our operations is conducted through our subsidiaries and joint ventures, our ability to service our debt is largely dependent on our receipt of distributions or other payments from our subsidiaries and joint ventures.
A significant portion of our operations is conducted through our subsidiaries and joint ventures. As a result, our ability to service our debt is largely dependent on the earnings of our subsidiaries and joint ventures and the payment of those earnings to us in the form of dividends, loans or advances and through repayment of loans or advances from us. Payments to us by our subsidiaries and joint ventures will be contingent upon our subsidiaries’ or joint ventures’ earnings and other business considerations and may be subject to statutory or contractual restrictions. In addition, there may be significant tax and other legal restrictions on the ability of non-U.S. subsidiaries or joint ventures to remit money to us.
The instruments governing our indebtedness do not limit our acquisitions and may allow us to incur additional indebtedness, including indebtedness in relation to acquisitions.
We have historically expanded our business primarily through acquisitions. A part of our business strategy is to continue to grow through acquisitions that complement and expand our distribution network. The terms of our indebtedness do not limit the number or scale of acquisitions that we may complete. Because the consummation of acquisitions and integration of acquired businesses involves significant risk, this means that investors in our securities will be subject to the risks inherent in our acquisition strategy.
| Item 1B. | Unresolved Staff Comments. |
NONE
| Item 2. | Properties. |
We operate on a global basis. We believe that our production facilities, research and development facilities, and administrative and sales offices are generally well maintained, effectively used and are adequate to operate our business. During 2010, the Company’s manufacturing plants operated at approximately 70% capacity in the aggregate.
Set forth below is information at December 31, 2010 regarding our significant facilities operated by our joint ventures and us:
| Location |
Principal Use |
Owned/Leased | ||
|
Amsterdam, the Netherlands |
Production of refinery catalysts, research and product development activities |
Owned |
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| Location |
Principal Use |
Owned/Leased | ||
|
Avonmouth, United Kingdom |
Production of flame retardants |
Owned; on leased land | ||
| Baton Rouge, Louisiana |
Research and product development activities, and production of flame retardants, catalysts and additives | Owned; on leased land | ||
| Baton Rouge, Louisiana |
Principal executive offices | Leased | ||
| Beijing, China | Regional sales and administrative offices | Leased | ||
| Bergheim, Germany |
Production of flame retardants and specialty products based on aluminum trihydrate and aluminum oxide, and research and product development activities | Owned | ||
| Budapest, Hungary | Regional shared services office | Leased | ||
| Dubai, United Arab Emirates | Regional sales and administrative offices | Leased | ||
| Houston, Texas | Regional sales and administrative offices | Leased | ||
| Jin Shan District, Shanghai, China |
Production of antioxidants and polymer intermediates | Owned; on leased land | ||
| Louvain-la-Neuve, Belgium |
Regional offices and research and customer technical service activities | Owned | ||
| La Voulte, France | Refinery catalysts regeneration and treatment, research and development activities | Owned by Eurecat S.A., a joint venture owned 50% by each of IFP Investissements and us | ||
| Magnolia, Arkansas |
Production of flame retardants, bromine, inorganic bromides, agricultural intermediates and tertiary amines | Owned | ||
| Mobile, Alabama | Production of tin stabilizers | Owned by Arkema Group LLC which operates the plant for Stannica LLC, a joint venture in which we and Arkema Group LLC each own a 50% interest | ||
| Moscow, Russia | Regional sales and administrative offices | Leased | ||
| Nanjing, China | Technology center, product repackaging and flame retardant production | Owned; on leased land | ||
| Niihama, Japan | Production of refinery catalysts | Leased by Nippon Ketjen Company Limited, a joint venture owned 50% by each of Sumitomo Metal Mining Company Limited and us | ||
| Ninghai County, Zhejiang Province, China |
Production of antioxidants and polymer intermediates | Owned; on leased land | ||
| Orangeburg, South Carolina | Production of flame retardants, aluminum alkyls and fine chemistry products, including pharmaceutical actives, fuel additives, orthoalkylated phenols, polymer modifiers and phenolic antioxidants | Owned | ||
| Pasadena, Texas | Production of aluminum alkyls, alkenyl succinic anhydride, orthoalkylated anilines, and other specialty chemicals | Owned | ||
| Pasadena, Texas | Production of refinery catalysts, research and development activities | Owned | ||
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| Location |
Principal Use |
Owned/Leased | ||
|
Pasadena, Texas |
Refinery catalysts regeneration services |
Owned by Eurecat U.S. Incorporated, a joint venture in which we own a 57.5% interest and a consortium of entities in various proportions owns the remaining interest | ||
| Safi, Jordan | Production of bromine and derivatives and flame retardants | Leased by JBC, a joint venture owned 50% by each of Arab Potash Company Limited and us | ||
| St. Jakobs/Breitenau, Austria |
Production of specialty magnesium hydroxide products | Leased by Magnifin Magnesiaprodukte GmbH & Co. KG, a joint venture owned 50% by each of Radex Heraklith Industriebeteiligung AG and us | ||
| Santa Cruz, Brazil | Production of catalysts, research and product development activities | Owned by Fábrica Carioca de Catalisadores S.A, a joint venture owned 50% by each of Petrobras Química S.A.—PETROQUISA and us | ||
| Seoul, South Korea | Regional sales and administrative offices | Leased | ||
| Shanghai, China | Regional sales and administrative offices | Leased | ||
| Shandong, China | Regional sales and administrative offices | Owned by Shandong Sinobrom, a joint venture in which we own a 75% interest and Weifang Rui Yin Investment Management and Consultancy Co. Ltd. owns a 25% interest | ||
| Singapore | Regional sales and administrative offices | Leased | ||
| South Haven, Michigan |
Production of custom fine chemistry products including pharmaceutical actives | Owned | ||
| Takaishi City, Osaka, Japan |
Production of aluminum alkyls | Owned by Nippon Aluminum Alkys, a joint venture owned 50% by each of Mitsui Chemicals, Inc. and us | ||
| Tokyo, Japan | Regional sales and administrative offices | Leased | ||
| Tokyo, Japan | Administrative offices | Leased by Nippon Ketjen Co., Ltd., a joint venture 50% owned by each of Sumitomo Metal Mining Co. Ltd. and us | ||
| Tokyo, Japan | Regional sales and administrative offices | Leased by Nippon Aluminum Alkyls, a joint venture owned 50% by each of Mitsui Chemicals, Inc. and us | ||
| Twinsburg, Ohio | Production of bromine-activated carbon | Leased | ||
| Tyrone, Pennsylvania |
Production of custom fine chemistry products, agricultural intermediates, performance polymer products and research and development activities | Owned | ||
| Yeosu, South Korea | Research and product development activities/small scale production of catalysts and catalyst components | Owned | ||
| Item 3. | Legal Proceedings. |
On July 3, 2006, we received a Notice of Violation, or NOV, from the EPA Region 4 regarding the implementation of the Pharmaceutical Maximum Achievable Control Technology standards at our plant in Orangeburg, South Carolina. The alleged violations include (i) the applicability of the specific regulations to certain intermediates manufactured at the plant, (ii) failure to comply with certain reporting requirements, (iii) improper evaluation and testing to properly implement the regulations and (iv) the sufficiency of the leak detection and repair program at the plant. We are currently engaged in discussions with the EPA seeking to resolve these allegations, but no assurances can be given that we will be able to reach a resolution that is acceptable to both parties. Any settlement or finding adverse to us could result in the payment by us of fines, penalties, capital expenditures, or some combination thereof. At this time, it is not possible to predict with any certainty the outcome of our discussions with the EPA or the financial impact, which may result therefrom. However, we do not expect any financial impact to have a material adverse effect on our results of operations or financial position.
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In addition, we are involved from time to time in legal proceedings of types regarded as common in our businesses, including administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability and premises liability litigation. Where appropriate, we may establish financial reserves as estimated by our general counsel for such proceedings. We also maintain insurance to mitigate certain of such risks.
| Item 4. | (Removed and Reserved). |
Executive Officers of the Registrant.
The names, ages and biographies of our executive officers and certain other officers as of February 25, 2011 are set forth below. The term of office of each officer is until the meeting of the Board of Directors following the next annual shareholders’ meeting (May 11, 2011).
| Name |
Age | Position | ||
| Mark C. Rohr | 59 | Chairman of the Board and Chief Executive Officer | ||
| Luther C. Kissam, IV | 46 | President | ||
| John M. Steitz | 52 | Executive Vice President and Chief Operating Officer | ||
| Karen G. Narwold | 51 | Senior Vice President, General Counsel and Corporate Secretary | ||
| Scott A. Tozier | 45 | Senior Vice President, Chief Financial Officer | ||
| William B. Allen, Jr. | 46 | Vice President, Corporate Controller and Chief Accounting Officer | ||
| David W. Clary | 51 | Vice President, Chief Sustainability Officer | ||
| Nicole C. Daniel | 42 | Vice President, Deputy General Counsel and Chief Compliance Officer | ||
| Richard G. Fishman | 58 | Vice President, Treasurer and Chief Tax Counsel | ||
| Ronald R. Gardner | 59 | Vice President, Fine Chemistry | ||
| Matthew K. Juneau | 50 | Vice President, Global Sales and Services | ||
| John J. Nicols | 46 | Vice President, Catalysts | ||
| Anthony S. Parnell | 51 | Vice President, Polymer Solutions | ||
| Darian K. Rich | 50 | Vice President, Human Resources | ||
| Milan R. Shah | 35 | Vice President, Business Development | ||
| Ronald C. Zumstein | 49 | Vice President, Manufacturing | ||
Mark C. Rohr serves as our Chairman of the Board and Chief Executive Officer effective March 15, 2010. Mr. Rohr previously served as Chairman of the Board, President and Chief Executive Officer from August 1, 2008 to March 15, 2010; as President and Chief Executive Officer from October 1, 2002 through July 31, 2008 and as President and Chief Operating Officer from January 1, 2000 through September 30, 2002. Mr. Rohr also served as Executive Vice President, Operations from March 22, 1999 through December 31, 1999. Before joining the Company, Mr. Rohr served as Senior Vice President, Specialty Chemicals of Occidental Chemical Corporation (chemical manufacturer with interests in basic chemicals, vinyls, petrochemicals and specialty products and subsidiary of Occidental Petroleum Corporation). Mr. Rohr currently serves as a director on the Boards of Directors of Celanese Corporation and Ashland Inc.
Luther C. Kissam, IV was elected as our President on March 15, 2010. Previously, Mr. Kissam served as Executive Vice President, Manufacturing and Law and Secretary from May 2009 until March 15, 2010, and as Senior Vice President, Manufacturing and Law, and Corporate Secretary from January 8, 2008 until May 2009. Mr. Kissam joined us in September 2003 and served as Vice President, General Counsel and Corporate Secretary from that time until December 16, 2005, when he was promoted to Senior Vice President, General Counsel and Corporate Secretary. Before joining us, Mr. Kissam served as Vice President, General Counsel and Secretary of Merisant Company (manufacturer and marketer of sweetener and consumer food products), having previously served as Associate General Counsel of Monsanto Company (provider of agricultural products and solutions).
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John M. Steitz was appointed as our Executive Vice President and Chief Operating Officer effective April 11, 2007. Mr. Steitz served as Senior Vice President, Business Operations since January 1, 2004 and as Vice President, Business Operations from October 2002 until January 2004. From July 2000 until October 2002, Mr. Steitz served as Vice President, Fine Chemistry on a global basis. Before joining us, he was Vice President and General Manager, Pharmaceutical Chemicals of Mallinckrodt, Incorporated (global provider of specialty healthcare products in the areas of diagnostic imaging, respiratory care and pain relief, and business unit of Tyco Healthcare) for 22 years. Mr. Steitz currently serves as a director on the Board of Directors of Innophos Holdings Inc.
Karen G. Narwold joined us on September 15, 2010, as Senior Vice President and General Counsel of Albemarle. Ms. Narwold also serves as our Corporate Secretary. Ms. Narwold has over 20 years of legal, management and business experience with global industrial and chemical companies. After 5 years in private practice, she served as Vice President, General Counsel, Human Resources and Secretary of GrafTech International Ltd., a global graphite and carbon manufacturer and former subsidiary of Union Carbide. She then served as Vice President and Strategic Counsel of Barzel Industries, a North American steel processor and distributor. Most recently, Ms. Narwold served as Special Counsel with Kelley Drye & Warren LLP and with Symmetry Advisors where she worked in the areas of strategic, financial and capital structure planning and restructuring for public and private companies.
Scott A. Tozier was elected as our Senior Vice President and Chief Financial Officer effective January 31, 2011. Mr. Tozier has over 20 years of diversified international financial management experience. Following four years of assurance services with the international firm Ernst & Young, LLP, Mr. Tozier joined Honeywell International, Inc., where his 16 year career spanned senior financial positions in the U.S., Australia and Europe. His roles of increasing responsibilities included management of financial planning, analysis and reporting, global credit and treasury services and Chief Financial Officer of Honeywell’s Transportation Systems, Turbo Technologies and Building Solutions divisions. Most recently, Mr. Tozier served as Vice President of Finance, Operations and Transformation of Honeywell International, Inc.
William B. Allen, Jr. was elected as our Chief Accounting Officer on August 12, 2010 following his previous appointment as Vice President and Corporate Controller on May 13, 2009. Mr. Allen had previously served as our Chief Financial Officer for our Catalysts and Fine Chemistry divisions from January 2006 until April 2009 and Corporate Controller from September 2003 until December 2005. Mr. Allen has held various other financial positions of increasing responsibility since joining us in May of 1994, including Director of Corporate Financial Planning and Analysis from July 2002 until September 2003 and Director of Finance for our European operations from April 1997 until June 2002.
David W. Clary was elected Vice President and Chief Sustainability Officer effective July 1, 2008. Dr. Clary previously served as Division Vice President of our Fine Chemistry Services and Intermediates business from January 1, 2006 until July 2008. Since joining the Company and Ethyl Corporation in 1985, Dr. Clary served as Director of Fine Chemistry Research and Development, and in other positions in research and development, manufacturing, and business management.
Nicole C. Daniel serves as Vice President, Deputy General Counsel and Chief Compliance Officer. Ms. Daniel has also held the positions of Assistant Corporate Secretary, Corporate Secretary and Director, Investor Relations at Albemarle. Ms. Daniel joined Albemarle in November 2002 as Associate Counsel. In March 2010, Ms. Daniel assumed the role of Chief Compliance Officer, where she oversees the Company’s global corporate compliance initiatives.
Richard G. Fishman was elected Vice President, Treasurer and Chief Tax Counsel effective February 18, 2009. He also served as the Company’s Interim Chief Financial Officer from August 30, 2010 until January 30, 2011. Mr. Fishman joined us on May 22, 2006 and previously served as our Vice President Tax and Chief Tax Counsel. Before joining us, he served nearly 18 years with Honeywell International Inc. in various tax positions, most recently as Director of International Taxation & Associate General Tax Counsel.
Ronald R. Gardner was elected Vice President, Fine Chemistry effective January 1, 2007. Mr. Gardner had previously served as Divisional Vice President, Performance Chemicals since 2002, and was Business Director, Bromine and Derivatives including Jordan Bromine start up and integration since 2001. Previously, he worked in research and development, manufacturing, international distribution, project management, and international business management (including a five-year assignment in Europe) since joining the Company and Ethyl Corporation in May 1973.
Matthew K. Juneau was elected Vice President, Global Sales and Service on May 13, 2009. Mr. Juneau previously held the position of Division Vice President of our performance chemicals business in the Fine Chemistry division since January 2007. Prior to that, Mr. Juneau held various positions of increasing responsibility in research and development and business management with us including Managing Director of our European operations from January 2003 until December 2007. Mr. Juneau joined us as a chemical engineer in June 1982.
John J. Nicols joined the Company and Ethyl Corporation in February 1990 and served as our Vice President, Fine Chemistry from June 2002 until January 1, 2007 when he was elected Vice President, Catalysts. Previously, Mr. Nicols ran our Global Flame
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Retardants business from February 1999 through June 2002. Additionally, Mr. Nicols led our Bromine Businesses in Asia from Tokyo, Japan from 1995 through 1998. Before joining us, Mr. Nicols worked for three years in manufacturing and research and development for Hercules, Inc. (specialty chemicals).
Anthony S. Parnell was elected Vice President, Polymer Solutions effective May 13, 2009. He previously held the position of Vice President, Global Sales, Service and Operations Planning since January 1, 2007. Prior to that, Mr. Parnell served as Vice President, Americas Sales Operations since 2002, and was Managing Director of our European operations from 1996 until 2002. He previously served in various commercial leadership positions at the Company and Ethyl Corporation since 1982.
Darian K. Rich joined us on October 29, 2008 and was elected Vice President of Human Resources effective November 1, 2008. Before joining us, Mr. Rich served 12 years with The Coca-Cola Company where he held several positions in the U.S. as Vice President, Human Resources and Asia in both line management and corporate operations and most recently as Vice President of Coca-Cola’s International Human Resource Services.
Milan R. Shah joined us on December 18, 2008 and was elected Vice President, Business Development effective February 18, 2009. Before joining us, Mr. Shah was with Deutsche Bank Securities, Inc. as a senior investment banker within its chemical industry advisory practice. While at Deutsche Bank, he worked with many of the leading companies in the chemical industry, including Albemarle, on financings, portfolio management, merger and acquisition execution and strategy development.
Ronald C. Zumstein was elected Vice President of Manufacturing on March 15, 2010 after having previously served as Vice President, Manufacturing Operations effective March 31, 2008. Dr. Zumstein previously served as our Vice President of Health, Safety and Environment and Vice President of Manufacturing for our Polymer Solutions division. Dr. Zumstein previously held various positions of increasing responsibility since joining the Company and Ethyl Corporation in 1987, including serving as Plant Manager at several of our U.S. manufacturing locations.
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock trades on the New York Stock Exchange, or the NYSE, under the symbol “ALB.” The following table sets forth on a per share basis the high and low sales prices for our common stock for the periods indicated as reported on the NYSE composite transactions reporting system and the dividends declared per share on our common stock.
| Common Stock Price Range | Dividends Declared Per Share of Common Stock |
|||||||||||
| High | Low | |||||||||||
| 2009 |
||||||||||||
| First Quarter |
$ | 24.96 | $ | 15.54 | $ | 0.125 | ||||||
| Second Quarter |
$ | 30.00 | $ | 20.99 | $ | 0.125 | ||||||
| Third Quarter |
$ | 35.40 | $ | 23.31 | $ | 0.125 | ||||||
| Fourth Quarter |
$ | 37.62 | $ | 31.00 | $ | 0.125 | ||||||
| 2010 |
||||||||||||
| First Quarter |
$ | 43.80 | $ | 34.49 | $ | 0.14 | ||||||
| Second Quarter |
$ | 46.97 | $ | 38.21 | $ | 0.14 | ||||||
| Third Quarter |
$ | 47.15 | $ | 38.47 | $ | 0.14 | ||||||
| Fourth Quarter |
$ | 57.34 | $ | 46.16 | $ | 0.14 | ||||||
There were 91,593,984 shares of common stock held by 3,555 shareholders of record as of December 31, 2010. On February 16, 2011, we declared a dividend of $0.165 per share of common stock, payable April 1, 2011.
Our stock repurchase plan, which was authorized by our Board of Directors, became effective on October 25, 2000 and included ten million shares. On February 27, 2008, after 98% of the originally authorized repurchase was executed, our Board of Directors approved an increase of five million shares authorized for repurchase under our stock repurchase plan. The stock repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder, unless the repurchase plan is earlier terminated by action of our Board of Directors or further shares are authorized for repurchase. We did not repurchase any shares of our common stock during the three-month period ended December 31, 2010.
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The information required by Item 201(d) of Regulation S-K is contained in our definitive Proxy Statement for our 2011 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A under the Exchange Act, or the Proxy Statement, and is incorporated herein by reference.
Stock Performance Graph
The graph below shows the cumulative total shareholder return assuming the investment of $100 in our common stock on December 31, 2004 and the reinvestment of all dividends thereafter. The information contained in the graph below is furnished and therefore not to be considered “filed” with the SEC, and is not incorporated by reference into any document that incorporates this Annual Report on Form 10-K by reference.
| Item 6. | Selected Financial Data. |
The information for the five years ended December 31, 2010, is contained in the “Five-Year Summary” included in Part IV, Item 15, Exhibit 99.1 and incorporated herein by reference.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Forward-looking Statements
Some of the information presented in this Annual Report on Form 10-K, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “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, therefore, that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:
| • | deterioration in economic and business conditions; |
| • | future financial and operating performance of our major customers and industries served by us; |
| • | the timing of orders received from customers; |
| • | the gain or loss of significant customers; |
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| • | competition from other manufacturers; |
| • | changes in the demand for our products; |
| • | limitations or prohibitions on the manufacture and sale of our products; |
| • | availability of raw materials; |
| • | changes in the cost of raw materials and energy, and our inability to pass through increases; |
| • | performance of acquired companies; |
| • | changes in our markets in general; |
| • | fluctuations in foreign currencies; |
| • | changes in laws and increased government regulation of our operations or our products; |
| • | the occurrence of claims or litigation; |
| • | the occurrence of natural disasters; |
| • | 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 unrest or 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 interest rates, to the extent such rates (1) affect our ability to raise capital or increase our cost of funds, (2) have an impact on the overall performance of our pension fund investments and (3) increase our pension expense and funding obligations; |
| • | volatility and substantial uncertainties in the debt and equity markets; and |
| • | the other factors detailed from time to time in the reports we file with the SEC. |
For further discussion regarding the Company’s business risks, see also Item 1A. Risk Factors.
We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Annual Report on Form 10-K.
The following is a discussion and analysis of results of operations for the years ended December 31, 2010, 2009 and 2008. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 42.
Overview and Outlook
We are a leading global developer, manufacturer, and marketer of highly-engineered specialty chemicals for consumer electronics, petroleum refining, utilities, packaging, construction, automotive/transportation, pharmaceuticals, crop protection, food-safety and custom chemistry services. We are committed to global sustainability and are advancing responsible eco-practices and solutions in our three business segments. We believe that our commercial and geographic diversity, technical expertise, flexible, low-cost global manufacturing base and experienced management team enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.
Our diverse product portfolio, broad geographic presence and customer-focused solutions will continue to be key drivers to our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace. We believe our disciplined cost reduction
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efforts, on-going productivity improvements and strong balance sheet position us well to take advantage of strengthening economic conditions while softening the negative impact of any temporary disruption in the economy.
2010 Highlights
| • | Selection as one of Corporate Responsibility Magazine’s 100 Best Corporate Citizens. In first quarter 2010, we were selected as one of Corporate Responsibility Magazine’s 100 Best Corporate Citizens for 2010. The companies listed in the 100 Best Corporate Citizens List are ranked based on scores in seven different categories including environment, climate change, human rights, philanthropy, employee relations and governance. |
| • | Opening of our Budapest Shared Services Center. On June 1, 2010, we announced the opening of our global shared services center in Budapest, Hungary. Known as Albemarle’s Center of Excellence (ACE), the facility was developed as part of the company’s “Project One Albemarle” initiative designed to standardize and streamline the company’s global processes, the result of which will be one automated, scalable global platform for Albemarle’s business which should improve productivity and better support the company’s long-term growth. |
| • | Capital investment in South Korea. On September 13, 2010, we announced the purchase of certain property and equipment in Yeosu, South Korea in connection with our plans for building a metallocene polyolefin catalyst and TMG manufacturing site. The site will effectively mirror Albemarle’s world scale metallocene polyolefin catalyst and TMG capabilities located in Baton Rouge, Louisiana. |
| • | Breakthrough in Curatives technology. On September 21, 2010, we announced the commercialization of ETHACURE(R) 90, a new polymer chain extender that greatly improves the processing capability of polyurea and polyurethane spray elastomer coating systems used in applications such as truck bed liners, concrete and steel coatings, potable water systems and industrial coatings. ETHACURE(R) 90 is a unique, new aliphatic diamine chain extender for aliphatic and aromatic formulations in sprayed and hand-applied coatings. Its low reactivity and highly compatible diamine chemistry provides formulators with improved cure-rate control in a wide range of aliphatic and aromatic systems. |
| • | Planned Construction of World Scale HPC plant in Brazil. On December 6, 2010, we announced that we had signed a memorandum of understanding to build a world scale HPC production plant on the site of our existing joint venture Fábrica Carioca de Catalisadores SA (FCC SA) in Santa Cruz, Brazil with Petrobras. The new facility will complement existing production of FCC catalysts. We are also further enhancing our partnership with Petrobras by engaging in a joint technical cooperation aimed at the further development of advanced HPC products, mirroring our very successful existing cooperation in the area of FCC catalysts. |
| • | Completion of Senior Notes Offering. We announced on December 10, 2010 the completion of our $350 million senior notes offering. The offering included $350 million in aggregate principal amount of 10-year senior unsecured notes with an annual coupon rate of 4.50 percent. The net proceeds of the offering were used for repayment of outstanding borrowings under the company’s revolving credit facility, funding voluntary pension contributions and for other general corporate purposes. |
| • | Operating Results. In 2010, we achieved annual earnings of $323.7 million, up 81% over 2009. These solid operating results contributed to strong cash flows from operations in the amount of $331.3 million for 2010. |
| • | Increased Dividends. We increased our dividend for the 16th consecutive year, ending the year at an annual dividend rate of $0.56 per share. Also, on February 16, 2011, we increased our quarterly dividend by 18% to $0.165 per share, payable on April 1, 2011. |
Outlook
We continue to see encouraging signs in the global markets that we serve with strong demand contributing to an already tight supply situation for many of our products. Our businesses are well positioned to capitalize on opportunities in both recovering markets and emerging markets that bring new demand. We continue to monitor key economic indicators and work to manage potential headwinds such as increased raw material and energy costs, pensions and other personnel costs. We ended 2010 with strong earnings, and we expect the same fundamentals that drove our 2010 performance to remain in place and position us to deliver solid earnings growth in 2011.
Polymer Solutions: We expect continued demand strength in consumer electronics, automotive and commercial construction to drive volume improvements in our fire safety business in 2011. Improving global standards of living, coupled with the potential for
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increasingly stringent fire-safety regulations and global climate initiatives should drive continued long-term demand for fire safety products.
Our presence in China should continue to grow with the newly added capacity of our antioxidants facility in Shanghai. Also, our phosphorous-based flame-retardant production capability at our Nanjing site, scheduled for expansion in 2011, is well positioned to serve the Asia Pacific construction and electronics markets.
GreenarmorTM, the first EarthwiseTM product from our Polymer Solutions segment, is expected to be commercially available in 2011. The EarthwiseTM portfolio is expected to grow to include products from other business units and segments of Albemarle.
Successful implementation of pricing initiatives is expected to help offset raw material inflation and fund further investment in new products and technologies.
Catalysts: We expect increased volumes and stable pricing to drive growth in our Catalysts segment during 2011. Increased global demand for petroleum products, generally deteriorating quality of crude oil feedstock and implementation of more stringent fuel quality requirements are expected to drive growth in our refinery catalyst business. We expect growth in our polyolefin catalysts division to come from growing global demand for specialty plastics, particularly in Asia and the Middle East. Our FCC refinery catalysts business has seen significant price increases in rare earth materials due to recent Chinese export quotas. We have taken appropriate steps to maintain sufficient security of supply for the foreseeable future, as well as implemented cost pass-through mechanisms that will help sustain current profitability levels for this business as we enter into 2011.
New market penetrations and introduction of innovative cost-effective Catalysts products for the refining and polyolefins industries are expected to contribute to the segment’s strong performance in 2011. We believe our focus on advanced product development in Catalysts is achieving commercial success. We have introduced new value-added refining solutions and technologies that enable refiners to increase yields, a critical advantage for refiners. Our marketing and research groups are tightly aligned which enables us to continue to bring innovative technologies to the market. Additionally, we expect to continue exploring new alternative fuel opportunities by partnering with leading renewable fuels technology developers who can benefit from Albemarle’s catalysis expertise.
We expect to leverage our existing positions in the Middle East, Asia and Brazil, along with our joint ventures, to capitalize on growth opportunities and further develop our leading position in those emerging markets. Our joint venture in Saudi Arabia with SABIC, expected to be operational in 2012, positions us to lead in the key Middle East developing region and the fast growing Middle East polyolefins market. Construction at our recently acquired Yeosu, South Korea site is progressing well. Existing assets allowed us to rapidly develop research and small-scale production facilities, adding immediate value to the metallocene polyolefin and high brightness LED regional markets. Intermediate commercial operations at the site are expected to begin in mid-2011, with the commercial facility being fully operational in 2012, to meet regional growth in metallocene polyolefins TMG markets for high brightness LED.
Fine Chemistry: Our Fine Chemistry segment continues to benefit from the rapid pace of innovation and the introduction of new products, coupled with the movement by companies to outsource certain research, product development and manufacturing functions. In our performance chemicals sector, we expect strong growth in 2011 as demand across our bromine franchise continues to expand, new applications widen the breadth of use of our bromine and bromine derivatives and global supply remains tight. Our completion fluids business has started to regain traction and we expect this trend to continue throughout 2011 as global drilling activity increases to satisfy higher fuel demand. Additionally, we are encouraged by long-term drivers in the U.S. and China for our mercury control business. We are positioned to provide these markets with sensible, sustainable solutions to meet new regulatory demands, including emission prevention and control directives for coal-fueled power plants in the U.S. and China and waste reduction initiatives in the cement production industry in connection with the new Cement-MACT mercury emission standard. We expect to sustain the healthy margins achieved as we closed out 2010 with continued focus on the two strategic areas in our Fine Chemistry segment – maximizing our bromine franchise value in the performance chemicals sector and continued growth of our fine chemistry services business. We expect favorable fixed cost absorption and continued high levels of operation of our bromine assets in 2011.
We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. We believe the global supply/demand gap will continue to tighten as demand for existing and new uses of bromine expand, and global supply remains tight. We are positioned to expand capacity as needed at our low-cost production facilities.
Our fine chemistry services product pipeline is strong and opportunities are expanding. Our pharmaceutical and crop protection businesses continue to deliver solid results. We expect product development opportunities to continue, such as partnering with ExxonMobil to make a specialty lubricant and with pharmaceutical developers like SIGA Technologies in their manufacture of the
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ST-246 smallpox drug. Our technical expertise, manufacturing capabilities and speed to market allow us to develop preferred outsourcing positions serving leading chemical and pharmaceutical innovators in diverse industries. We believe we will continue to generate growth in profitable niche products leveraged from this service business.
Corporate and Other: We continue to focus on cash generation, working capital management and process efficiency while monitoring headwinds from pensions and employee benefit costs. In addition, we will continue to focus on tax efficiencies; however, incremental income is more likely to be earned in locales with higher incremental rates than was the case in 2010. We believe our global effective tax rate for 2011 should be approximately 25%, but will vary based on the locales in which income is actually earned. We increased our quarterly dividend payout in the first quarter of 2011 to 16.5 cents per share. Under our existing share repurchase program, we expect to periodically repurchase shares in 2011 on an opportunistic basis. In addition, we remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint.
Additional information regarding our products, markets and financial performance is provided at our web site, www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.
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 condensed consolidated statements of income.
| Selected Financial Data | Year Ended December 31, | Percentage Change | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 vs. 2009 |
2009 vs. 2008 | ||||||||||||||||||||||
| (In thousands, except percentages and per share amounts) | ||||||||||||||||||||||||||
| NET SALES |
$ | 2,362,764 | $ | 2,005,394 | $ | 2,467,115 | 18 | % | (19 | )% | ||||||||||||||||
| Cost of goods sold |
1,616,842 | 1,521,532 | 1,859,441 | 6 | % | (18 | )% | |||||||||||||||||||
| GROSS PROFIT |
745,922 | 483,862 | 607,674 | 54 | % | (20 | )% | |||||||||||||||||||
| GROSS PROFIT MARGIN |
31.6 | % | 24.1 | % | 24.6 | % | ||||||||||||||||||||
| Selling, general and administrative expenses |
265,722 | 212,628 | 255,132 | 25 | % | (17 | )% | |||||||||||||||||||
| Research and development expenses |
58,394 | 60,918 | 67,292 | (4 | )% | (9 | )% | |||||||||||||||||||
| Restructuring and other charges |
6,958 | 11,643 | 25,789 | (40 | )% | (55 | )% | |||||||||||||||||||
| Port de Bouc facility disposition charges |
— | 12,393 | 38,544 | * | (68 | )% | ||||||||||||||||||||
| OPERATING PROFIT |
414,848 | 186,280 | 220,917 | 123 | % | (16 | )% | |||||||||||||||||||
| OPERATING PROFIT MARGIN |
17.6 | % | 9.3 | % | 9.0 | % | ||||||||||||||||||||
| Interest and financing expenses |
(25,533 | ) | (24,584 | ) | (38,175 | ) | 4 | % | (36 | )% | ||||||||||||||||
| Other income (expenses), net |
2,788 | (1,423 | ) | 601 | 296 | % | (337 | )% | ||||||||||||||||||
| INCOME BEFORE INCOME TAXES AND EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS |
392,103 | 160,273 | 183,343 | 145 | % | (13 | )% | |||||||||||||||||||
| Income tax expense (benefit) |
92,719 | (7,028 | ) | (6,539 | ) | * | 7 | % | ||||||||||||||||||
| Effective tax rate |
23.6 | % | (4.4 | )% | (3.6 | )% | ||||||||||||||||||||
| INCOME BEFORE EQUITY IN NET INCOME OF UNCONSOLIDATED INVESTMENTS |
299,384 | 167,301 | 189,882 | 79 | % | (12 | )% | |||||||||||||||||||
| Equity in net income of unconsolidated investments (net of tax) |
37,975 | 22,322 | 23,126 | 70 | % | (3 | )% | |||||||||||||||||||
| NET INCOME |
$ | 337,359 | $ | 189,623 | $ | 213,008 | 78 | % | (11 | )% | ||||||||||||||||
| Net income attributable to noncontrolling interests |
(13,639 | ) | (11,255 | ) | (18,806 | ) | 21 | % | (40 | )% | ||||||||||||||||
| NET INCOME ATTRIBUTABLE TO ALBEMARLE CORPORATION |
$ | 323,720 | $ | 178,368 | $ | 194,202 | 81 | % | (8 | )% | ||||||||||||||||
| PERCENTAGE OF NET SALES |
13.7 | % | 8.9 | % | 7.9 | % | ||||||||||||||||||||
| Basic earnings per share |
$ | 3.54 | $ | 1.95 | $ | 2.12 | 82 | % | (8 | )% | ||||||||||||||||
| Diluted earnings per share |
$ | 3.51 | $ | 1.94 | $ | 2.09 | 81 | % | (7 | )% | ||||||||||||||||
| * Percentage calculation is not meaningful. |
||||||||||||||||||||||||||
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Comparison of 2010 to 2009
Net Sales
For the year ended December 31, 2010, we reported net sales of $2.36 billion, which was an 18% increase compared to net sales of $2.01 billion for the year ended December 31, 2009. This increase was due primarily to an increase in volumes in all segments which benefited from the global economic recovery as well as favorable price/mix, partly offset by unfavorable foreign exchange impacts (mainly the weaker Euro). Volumes and price/mix had a positive impact on sales of 17% and 2% respectively, partly offset by unfavorable foreign exchange impacts of 1%.
Polymer Solutions net sales increased $206.5 million, or 30%, for the year ended December 31, 2010 versus the year ended December 31, 2009. This increase was mainly due to the impact of higher volumes of 25% and favorable pricing/mix of 6%, offset in part by unfavorable foreign exchange of 1%. Catalysts net sales for the year 2010 increased $81.9 million, or 10%, compared to 2009 due mainly to higher volumes. Fine Chemistry net sales increased $68.9 million, or 14%, for the year ended December 31, 2010 compared to last year mainly due to the impact of higher volumes of 17%, partly offset by unfavorable price/mix impacts of 2% and unfavorable foreign exchange impacts of 1%. For a detailed discussion of revenues and segment income for each segment see “Segment Information Overview” below.
Gross Profit
For the year ended December 31, 2010, our gross profit increased $262.1 million, or 54%, from the corresponding 2009 period, due mainly to sales volume improvements, favorable production rate impacts on cost in our bromine franchise and improved realization of metals costs in HPC refinery catalysts. We operated our manufacturing facilities at higher rates in 2010 than prior year to meet current sales demands, contributing to favorable profit effects from higher fixed cost absorption with only minor offsetting increases in manufacturing spending due to the increased production levels. These key factors contributed to overall improvement in our gross profit margin for the year ended December 31, 2010 to 31.6%, up from 24.1% for the year 2009.
Selling, General and Administrative Expenses
For the year ended December 31, 2010, our selling, general and administrative (SG&A) expenses increased $53.1 million, or 25%, from the year ended December 31, 2009. This increase was primarily due to higher employee related expenses during 2010 versus the corresponding period in 2009. Also, SG&A expenses for 2009 included adjustments of $7.0 million associated with the reversal of certain long-term employee benefit accruals. As a percentage of net sales, SG&A expenses were 11.2% for the year ended December 31, 2010 as compared to 10.6% for the corresponding period in 2009.
Research and Development Expenses
For the year ended December 31, 2010, our research and development (R&D) expenses decreased $2.5 million, or 4%, from the year ended December 31, 2009. This decrease was primarily due to reductions in discretionary spending partly offset with continuing investment in the technologies supporting our growth programs across our segments. As a percentage of net sales, R&D expenses were 2.5% for the year ended December 31, 2010 in comparison to 3.0% for the corresponding period in 2009.
Restructuring and Other Charges
The year ended December 31, 2010 included first quarter 2010 charges amounting to $7.0 million ($4.6 million after income taxes) for restructuring costs related principally to planned reductions in force at our Bergheim, Germany site. The year ended December 31, 2009 includes $11.6 million in pre-tax charges ($7.6 million after income taxes) for restructuring and other costs related principally to planned reductions in force and to the write-off of certain assets at our Arkansas facility. The programs associated with these charges have and will continue to yield favorable impacts in our reported operating costs in future reporting periods. We have and will continue to fund the majority of the obligations associated with these programs with cash flow generated from operating activities.
Port de Bouc Facility Disposition Charges
The year ended December 31, 2009 included charges amounting to $12.4 million ($8.2 million after income taxes) that related to the costs of a final contract settlement arising from the 2008 divestiture of the Port de Bouc, France facility. Monetary obligations associated with these charges were substantially settled in 2009.
Interest and Financing Expenses
Interest and financing expenses for the year ended December 31, 2010 were $25.5 million, comparable with the corresponding 2009 period amount of $24.6 million.
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Other Income (Expenses), Net
Other income (expenses), net for the year ended December 31, 2010 was favorable $4.2 million compared to 2009 due primarily to higher net foreign currency exchange gains and other miscellaneous items in the current year, offset in part by lower interest income.
Income Tax Expense (Benefit)
Our effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to available tax credits and tax planning opportunities available to us. For 2010, our effective income tax rate was 23.6% compared to (4.4)% for 2009. The 2009 period was impacted by $22.8 million in tax benefits comprised mainly from the settlement of the Internal Revenue Service, or IRS, tax audits for the tax years 2005 through 2007.
The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for 2010 and 2009, respectively, are as follows:
| % of Income Before Income Taxes | ||||||||
| 2010 | 2009 | |||||||
| Federal statutory rate |
35.0% | 35.0% | ||||||
| State taxes, net of federal tax benefit |
1.3 | 1.1 | ||||||
| Change in valuation allowance |
(0.4) | (0.9) | ||||||
| Impact of foreign earnings, net |
(9.4) | (22.6) | ||||||
| Effect of net income attributable to noncontrolling interests |
— | (0.8) | ||||||
| Effect of completing domestic audits |
— | 5.7 | ||||||
| Depletion |
(1.0) | (1.7) | ||||||
| Revaluation of unrecognized tax benefits/reserve requirements |
0.1 | (19.7) | ||||||
| Manufacturing tax deduction |
(1.6) | — | ||||||
| Other items, net |
(0.4) | (0.5) | ||||||
| Effective income tax rate |
23.6% | (4.4)% | ||||||
Equity in Net Income of Unconsolidated Investments
Equity in net income of unconsolidated investments was $38.0 million for the year ended December 31, 2010 compared to $22.3 million in 2009. This increase of $15.7 million was due primarily to higher overall equity earnings from our various Catalysts segment joint ventures, particularly in our Nippon Ketjen joint venture due mainly to favorable material input costs in the current year, our FCC SA joint venture due to lower variable input costs compared to the prior year, and the inclusion of the equity results of our Stannica LLC joint venture (which we deconsolidated on January 1, 2010). We also had higher equity earnings from our Magnifin joint venture in our Polymer Solutions segment due to increased demand in the automotive sector.
Net Income Attributable to Noncontrolling Interests
For the year ended December 31, 2010, net income attributable to noncontrolling interests was $13.6 million compared to $11.3 million in 2009. This increase was due primarily to $5.6 million in higher noncontrolling interest earnings of JBC as a result of improvements in bromine franchise sales volumes, offset in part by the impacts of the deconsolidation of our Stannica LLC joint venture, which reported $3.7 million in net income attributable to noncontrolling interests for the year ended December 31, 2009.
Net Income Attributable to Albemarle Corporation
Net income attributable to Albemarle Corporation increased to $323.7 million for the year ended December 31, 2010 from $178.4 million for the year ended December 31, 2009 primarily due to sales and production volume increases, favorable fixed cost absorption across our businesses, favorable metals cost realization in our HPC refinery catalysts business, favorable equity in net income of our unconsolidated investments, lower special items, lower R&D spending and favorable other income (expense), net. These favorable impacts were partially offset by higher SG&A costs, higher income taxes, higher net income attributable to noncontrolling interests and higher interest and financing expenses.
Segment Information Overview. We have identified three reportable segments in accordance with current accounting guidance. Our Polymer Solutions segment is comprised of the flame retardants and stabilizers and curatives product areas. Our Catalysts segment is comprised of the refinery catalysts and polyolefin catalysts product areas. Our Fine Chemistry segment is comprised of the
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performance chemicals and fine chemistry services and intermediates product areas. Segment income represents operating profit (adjusted for special items), equity in net income of unconsolidated investments and net income attributable to noncontrolling interests. On January 1, 2010, we sold a 10% interest in our previously consolidated investment in Stannica LLC, resulting in a change in accounting for this subsidiary to the equity method. Effective June 30, 2008, we acquired the remaining 25% of the Jinhai antioxidants business joint ventures, thereby eliminating the related noncontrolling interest. Segment data includes intersegment transfers of raw materials at cost, foreign exchange transaction gains and losses and allocations for certain corporate costs.
| Year Ended December 31, | Percentage Change |
|||||||||||||||||||
| 2010 | % of net sales |
2009 | % of net sales |
2010 vs 2009 | ||||||||||||||||
| Net sales: | (In thousands, except percentages) | |||||||||||||||||||
| Polymer Solutions |
$ | 903,745 | 38.2% | $ | 697,206 | 34.8% | 30% | |||||||||||||
| Catalysts |
890,007 | 37.7% | 808,063 | 40.3% | 10% | |||||||||||||||
| Fine Chemistry |
569,012 | 24.1% | 500,125 | 24.9% | 14% | |||||||||||||||
| Total net sales |
$ | 2,362,764 | 100.0% | $ | 2,005,394 | 100.0% | 18% | |||||||||||||
| Segment operating profit: |
||||||||||||||||||||
| Polymer Solutions |
$ | 195,681 | 21.7% | $ | 63,780 | 9.1% | 207% | |||||||||||||
| Catalysts |
219,125 | 24.6% | 129,691 | 16.0% | 69% | |||||||||||||||
| Fine Chemistry |
79,505 | 14.0% | 52,589 | 10.5% | 51% | |||||||||||||||
| Subtotal |
494,311 | 246,060 | 101% | |||||||||||||||||
| Equity in net income of unconsolidated investments: |
||||||||||||||||||||
| Polymer Solutions |
8,734 | 3,496 | 150% | |||||||||||||||||
| Catalysts |
29,648 | 18,934 | 57% | |||||||||||||||||
| Fine Chemistry |
— | — | —% | |||||||||||||||||
| Corporate & other |
(407 | ) | (108 | ) | 277% | |||||||||||||||
| Total equity in net income of unconsolidated investments |
37,975 | 22,322 | 70% | |||||||||||||||||
| Net income attributable to noncontrolling interests: |
||||||||||||||||||||
| Polymer Solutions |
(6,154 | ) | (5,886 | ) | 5% | |||||||||||||||
| Catalysts |
— | — | —% | |||||||||||||||||
| Fine Chemistry |
(7,357 | ) | (5,471 | ) | 34% | |||||||||||||||
| Corporate & other |
(128 | ) | 102 | 225% | ||||||||||||||||
| Total net income attributable to noncontrolling interests |
(13,639 | ) | (11,255 | ) | 21% | |||||||||||||||
| Segment income: |
||||||||||||||||||||
| Polymer Solutions |
198,261 | 21.9% | 61,390 | 8.8% | 223% | |||||||||||||||
| Catalysts |
248,773 | 28.0% | 148,625 | 18.4% | 67% | |||||||||||||||
| Fine Chemistry |
72,148 | 12.7% | 47,118 | 9.4% | 53% | |||||||||||||||
| Total segment income |
519,182 | 257,133 | 102% | |||||||||||||||||
| Corporate & other |
(73,040 | ) | (35,750 | ) | 104% | |||||||||||||||
| Restructuring and other charges |
(6,958 | ) | (11,643 | ) | (40)% | |||||||||||||||
| Port de Bouc facility disposition charges |
— | (12,393 | ) | * | ||||||||||||||||
| Interest and financing expenses |
(25,533 | ) | (24,584 | ) | 4% | |||||||||||||||
| Other income (expenses), net |
2,788 | (1,423 | ) | 296% | ||||||||||||||||
| Income tax (expense) benefit |
(92,719 | ) | 7,028 | * | ||||||||||||||||
| Net income attributable to Albemarle Corporation |
$ | 323,720 | $ | 178,368 | 81% | |||||||||||||||
* Percentage calculation is not meaningful.
Our segment information includes measures we refer to as “segment operating profit” and “segment income” which are financial measures that are not required by, or presented in accordance with, accounting principles generally accepted in the United States (“GAAP”). The Company has reported segment operating profit and segment income because management believes that these financial measures provide transparency to investors and enable period-to-period comparability of financial performance. Segment operating profit and segment income should not be considered as an alternative to operating profit or net income attributable to Albemarle Corporation, respectively, as determined in accordance with GAAP.
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See below for a reconciliation of segment operating profit and segment income, the non-GAAP financial measures, to operating profit and net income attributable to Albemarle Corporation, respectively, the most directly comparable financial measures calculated and reported in accordance with GAAP.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Total segment operating profit |
$ | 494,311 | $ | 246,060 | ||||
| Add (less): |
||||||||
| Corporate & other(a) |
(72,505 | ) | (35,744 | ) | ||||
| Restructuring and other charges |
(6,958 | ) | (11,643 | ) | ||||
| Port de Bouc facility disposition charges |
— | (12,393 | ) | |||||
| GAAP Operating profit |
$ | 414,848 | $ | 186,280 | ||||
| Total segment income |
$ | 519,182 | $ | 257,133 | ||||
| Add (less): |
||||||||
| Corporate & other |
(73,040 | ) | (35,750 | ) | ||||
| Restructuring and other charges |
(6,958 | ) | (11,643 | ) | ||||
| Port de Bouc facility disposition charges |
— | (12,393 | ) | |||||
| Interest and financing expenses |
(25,533 | ) | (24,584 | ) | ||||
| Other income (expense), net |
2,788 | (1,423 | ) | |||||
| Income tax (expense) benefit |
(92,719 | ) | 7,028 | |||||
| GAAP Net income attributable to Albemarle Corporation |
$ | 323,720 | $ | 178,368 | ||||
| (a) | Excludes corporate equity income and noncontrolling interest adjustments of $535 and $6 for the years ended December 31, 2010 and 2009, respectively. |
Polymer Solutions
Polymer Solutions segment net sales for the year ended December 31, 2010 were $903.7 million, up $206.5 million, or 30%, in comparison to the year ended December 31, 2009. This increase was mainly due to the impact of higher volumes of 25% (net of $42.9 million in unfavorable net sales impact from the January 1, 2010 Stannica LLC deconsolidation) and favorable price/mix impacts of 6%, offset in part by unfavorable foreign exchange impacts of 1% (mainly the weaker Euro). The increase in volumes, directly resulting from improved economic conditions over 2009, was primarily in our fire safety portfolio in the consumer electronics, automotive and construction sectors, while our stabilizers and curatives product lines also showed higher volumes in antioxidants and curatives. Segment income for the year ended December 31, 2010 was $198.3 million versus $61.4 million for 2009. The year-over-year improvement in operating performance was due mainly to the sales volume and price/mix improvements noted above, as well as higher production volumes which contributed to favorable fixed cost absorption. Also, Polymer Solutions segment income for 2010 benefited from higher equity in net income of $5.2 million from its unconsolidated investment Magnifin due to increased demand in the automotive sector compared to the prior year, as well as the favorable impact of the January 1, 2010 deconsolidation of Stannica LLC (which reported $3.7 million in net income attributable to noncontrolling interests in the Polymer Solutions segment results during the year ended December 31, 2009). These favorable items were partially offset by $4.0 million in higher net income attributable to noncontrolling interests resulting from improved performance in our JBC joint venture.
Catalysts
Catalysts segment net sales for the year ended December 31, 2010 were $890.0 million, an increase of $81.9 million, or 10%, versus the year ended December 31, 2009. This increase was due mainly to higher volumes in refinery catalysts, particularly FCC refinery catalysts (due to higher refinery operating rates) and alternative fuels, as well as an increase in volumes in polyolefin catalysts arising from stronger customer demand over the challenged 2009 year. Catalysts segment income increased 67%, or $100.1 million, to $248.8 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. This increase was mainly in our HPC business due mainly to improved realization of metals cost pass-through impacts year-over-year, as well as favorable sales
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and production volumes in FCC refinery catalysts and alternative fuels, and favorable volumes in polyolefin catalysts. Catalysts segment income for the year ended December 31, 2010 also benefited $10.7 million from higher equity in net income from unconsolidated joint ventures, particularly in Nippon Ketjen due mainly to favorable material input costs versus the prior year, our FCC SA joint venture due to lower variable input costs and favorable equity results from our Stannica LLC joint venture investment (which we deconsolidated on January 1, 2010 and whose results were previously reported in the Polymer Solutions segment in prior years). These favorable impacts on segment income for Catalysts were offset in part by higher SG&A/R&D spending of $10.5 million compared to the corresponding period in 2009.
Fine Chemistry
Fine Chemistry segment net sales for the year ended December 31, 2010 were $569.0 million, an increase of $68.9 million, or 14%, versus the year ended December 31, 2009, with higher volumes mainly in performance chemicals (resulting from overall improved customer demand) contributing 17% of the increase. These favorable volume impacts (net of $7.2 million in unfavorable sales impacts from the July 30, 2010 divestiture of our Teesport, UK site) were partly offset by unfavorable price/mix impacts of 2% and unfavorable foreign exchange impacts of 1% (mainly the weaker Euro). Fine Chemistry segment income for the year ended December 31, 2010 was $72.1 million, up $25.0 million, or 53%, from 2009. These improved results were due to higher sales and production volumes in the segment, mainly in performance chemicals, offset in part by higher SG&A/R&D spending of $6.4 million and $1.9 million in higher net income in noncontrolling interests resulting mainly from improved performance in our JBC joint venture.
Corporate and Other
For the year ended December 31, 2010, our Corporate and other expense was $73.0 million versus $35.8 million for the year ended December 31, 2009. This increase was primarily due to higher employee related costs. Also, the year ended December 31, 2009 included adjustments of $7.8 million associated with the reversal of certain long-term employee benefit accruals, reflected mainly in SG&A expenses.
Comparison of 2009 to 2008
Net Sales
For 2009, we recorded net sales of $2.01 billion, a decrease of $461.7 million, or 19%, compared to net sales of $2.47 billion for 2008. This decrease was due primarily to lower volumes and unfavorable price/mix across our operating segments, including metals pass through impacts. Overall, volumes declined 12% with another 5% decline due to price/mix compared to 2008.
Our Polymer Solutions segment’s net sales for 2009 decreased $218.3 million, or 24%, compared to 2008 primarily due to lower volumes of 19%, mix of 4%, and unfavorable foreign currency of 1%. Our Catalysts segment’s net sales decreased $115.7 million, or 13%, due mainly to an 8% decline in price/mix including metals pass through impacts, a 4% decrease in volume and a 1% decrease related to foreign currency. Our Fine Chemistry segment’s net sales decreased $127.7 million, or 20%, primarily due to lower volumes of 16%, unfavorable price/mix of 3%, and a decrease of 1% in foreign currency.
Gross Profit
For 2009, our gross profit decreased $123.8 million, or 20%, from 2008 to $483.9 million due mainly to volume declines, unfavorable production rate impacts on cost in our bromine franchise and high cost metals impacts on HPC refinery catalysts, offset mainly by favorable manufacturing cost spending resulting from our recent cost saving actions. During 2009, we operated our manufacturing facilities at reduced rates to control inventory levels, contributing to unfavorable profit effects from lower fixed cost absorption. Overall, these factors contributed to our decline in gross profit margin for 2009 to 24.1% from 24.6% in 2008.
Selling, General and Administrative Expenses
For 2009, our SG&A expenses decreased $42.5 million, or 17%, from 2008. This decrease was primarily due to a reduction in personnel costs and discretionary spending resulting from our recent cost saving actions including first quarter 2009 adjustments of $7.0 million associated with the reversal of certain long-term employee benefit accruals. As a percentage of net sales, SG&A expenses were 10.6% in 2009 versus 10.3% in 2008.
Research and Development Expenses
For 2009, R&D expenses decreased $6.4 million, or 9%, from 2008. This decrease was primarily due to reductions in personnel related costs and other discretionary spending offset with continuing investment in technologies supporting our growth programs across our segments. As a percentage of net sales, our R&D expenses were 3.0% and 2.7% in 2009 and 2008, respectively.
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Port de Bouc Facility Disposition Charges
Our 2008 results included a charge of $38.5 million ($33.4 million after income taxes) related to the divestiture of the Port de Bouc, France facility to International Chemical Investors Group S.A. effective December 31, 2008. The charge was principally due to the disposition of long-term assets of $22.6 million and other charges totaling $15.9 million. In 2009, we incurred $12.4 million in additional pre-tax charges ($8.2 million after income taxes) associated with the final contractual settlement of this disposition. Monetary obligations associated with these charges were substantially settled in 2009.
Restructuring and Other Charges
The year ended December 31, 2009 includes $11.6 million in pre-tax charges ($7.6 million after income taxes) for restructuring and other costs related principally to planned reductions in force and to the write-off of certain assets at our Arkansas facility. Our 2008 results included a charge amounting to $25.8 million ($16.8 million after income taxes) related to restructuring activities, principally reductions in force at various locations across our operating segments. The programs associated with these charges have and will continue to yield favorable impacts in our reported operating costs. We have funded the majority of the obligations associated with these charges with cash flow from operations.
Interest and Financing Expenses
Interest and financing expenses for 2009 decreased $13.6 million from 2008 to $24.6 million due mainly to lower average interest rates on our March 2007 credit agreement.
Other (Expenses) Income, Net
Other (expenses) income, net for 2009 decreased $2.0 million from 2008 to a net expense of $(1.4) million primarily due to a decrease in interest income as a result of lower average interest rates.
Income Tax (Benefit)
Our effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to available tax credits and tax planning opportunities available to us. For 2009, our effective income tax rate was (4.4)% compared to (3.6)% for 2008. The effective tax rate for 2009 reflected $22.8 million in tax benefits arising mainly from the settlement of the Internal Revenue Service, or IRS, tax audits for the tax years 2005 through 2007. Excluding these tax benefits and other specials, the effective tax rate for 2009 was 13.0%. The 2008 period was impacted by a net $5.1 million benefit related to the divestiture of our Port de Bouc, France operations, a net $32.4 million benefit from the settlement of the IRS tax audits for the tax years 2000 through 2004, a tax reserve of $6.9 million due to changes in tax rules and $3.9 million in valuation allowances based upon an assessment of our ability to use certain net operating losses.
The significant differences between the U.S. federal statutory income tax rate on pretax income and the effective income tax rate for 2009 and 2008, respectively, are as follows:
| % of Income Before Income Taxes | ||||||||
| 2009 | 2008 | |||||||
| Federal statutory rate |
35.0% | 35.0% | ||||||
| State taxes, net of federal tax benefit |
1.1 | (0.5) | ||||||
| Change in valuation allowance |
(0.9) | 14.6 | ||||||
| Impact of foreign earnings, net |
(22.6) | (26.0) | ||||||
| Effect of net income attributable to noncontrolling interests |
(0.8) | (0.8) | ||||||
| Loss on investment in foreign operations |
— | (11.4) | ||||||
| Effect of completing domestic audits |
5.7 | 0.8 | ||||||
| Depletion |
(1.7) | (2.6) | ||||||
| Revaluation of unrecognized tax benefits/reserve requirements |
(19.7) | (11.2) | ||||||
| Other items, net |
(0.5) | (1.5) | ||||||
| Effective income tax rate |
(4.4)% | (3.6)% | ||||||
Equity in Net Income of Unconsolidated Investments
Equity in net income of unconsolidated investments was $22.3 million for 2009 compared to $23.1 million in 2008. This net decrease of $0.8 million is due primarily to the Catalysts segment with lower equity earnings from its Nippon Ketjen joint venture partially offset by improved year over year earnings from its Brazilian joint venture FCC SA.
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Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $11.3 million in 2009 compared to $18.8 million in 2008. This decrease of $7.5 million was due primarily to lower earnings of Jordan Bromine Company Limited resulting from lower bromine volumes as well as lower earnings of Stannica LLC.
Net Income Attributable to Albemarle Corporation
Net income attributable to Albemarle Corporation decreased 8% to $178.4 million in 2009 from $194.2 million in 2008 primarily due to volume declines, unfavorable fixed cost absorption across our businesses, and high cost metals impacts on HPC refinery catalysts. These impacts were partially offset by reduced fixed manufacturing and SG&A/R&D spending as a result of our recent cost saving actions, lower special items, a decline in interest and financing expenses and lower net income attributable to noncontrolling interests.
| Year Ended December 31, | Percentage Change |
|||||||||||||||||||
| 2009 | % of net sales |
2008 | % of net sales |
2009 vs 2008 | ||||||||||||||||
| Net sales: | (In millions, except percentages) | |||||||||||||||||||
| Polymer Solutions |
$ | 697,206 | 34.8% | $ | 915,515 | 37.1% | (24)% | |||||||||||||
| Catalysts |
808,063 | 40.3% | 923,763 | 37.4% | (13)% | |||||||||||||||
| Fine Chemistry |
500,125 | 24.9% | 627,837 | 25.5% | (20)% | |||||||||||||||
| Total net sales |
$ | 2,005,394 | 100.0% | $ | 2,467,115 | 100.0% | (19)% | |||||||||||||
| Segment operating profit: |
||||||||||||||||||||
| Polymer Solutions |
$ | 63,780 | 9.1% | $ | 92,600 | 10.1% | (31)% | |||||||||||||
| Catalysts |
129,691 | 16.0% | 142,715 | 15.4% | (9)% | |||||||||||||||
| Fine Chemistry |
52,589 | 10.5% | 99,895 | 15.9% | (47)% | |||||||||||||||
| Subtotal |
246,060 | 335,210 | (27)% | |||||||||||||||||
| Equity in net income of unconsolidated investments: |
||||||||||||||||||||
| Polymer Solutions |
3,496 | 3,446 | 1% | |||||||||||||||||
| Catalysts |
18,934 | 19,881 | (5)% | |||||||||||||||||
| Fine Chemistry |
— | — | —% | |||||||||||||||||
| Corporate & other |
(108 | ) | (201 | ) | (46)% | |||||||||||||||
| Total equity in net income of unconsolidated investments |
22,322 | 23,126 | (3)% | |||||||||||||||||
| Net income attributable to noncontrolling interests: |
||||||||||||||||||||
| Polymer Solutions |
(5,886 | ) | (7,223 | ) | (19)% | |||||||||||||||
| Catalysts |
— | — | —% | |||||||||||||||||
| Fine Chemistry |
(5,471 | ) | (11,422 | ) | (52)% | |||||||||||||||
| Corporate & other |
102 | (161 | ) | (163)% | ||||||||||||||||
| Total net income attributable to noncontrolling interests |
(11,255 | ) | (18,806 | ) | (40)% | |||||||||||||||
| Segment income: |
||||||||||||||||||||
| Polymer Solutions |
61,390 | 8.8% | 88,823 | 9.7% | (31)% | |||||||||||||||
| Catalysts |
148,625 | 18.4% | 162,596 | 17.6% | (9)% | |||||||||||||||
| Fine Chemistry |
47,118 | 9.4% | 88,473 | 14.1% | (47)% | |||||||||||||||
| Total segment income |
257,133 | 339,892 | (24)% | |||||||||||||||||
| Corporate & Other |
(35,750 | ) | (50,322 | ) | (29)% | |||||||||||||||
| Restructuring and other charges |
(11,643 | ) | (25,789 | ) | (55)% | |||||||||||||||
| Port de Bouc facility disposition charges |
(12,393 | ) | (38,544 | ) | (68)% | |||||||||||||||
| Interest and financing expenses |
(24,584 | ) | (38,175 | ) | (36)% | |||||||||||||||
| Other (expenses) income, net |
(1,423 | ) | 601 | (337)% | ||||||||||||||||
| Income tax benefit |
7,028 | 6,539 | 7% | |||||||||||||||||
| Net income attributable to Albemarle Corporation |
$ | 178,368 | $ | 194,202 | (8)% | |||||||||||||||
* Percentage calculation is not meaningful.
Our segment information includes measures we refer to as “segment operating profit” and “segment income” which are financial measures that are not required by, or presented in accordance with GAAP. The Company has reported segment operating profit and
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segment income because management believes that these financial measures provide transparency to investors and enable period-to-period comparability of financial performance. Segment operating profit and segment income should not be considered as an alternative to operating profit or net income attributable to Albemarle Corporation, respectively, as determined in accordance with GAAP.
See below for a reconciliation of segment operating profit and segment income, the non-GAAP financial measures, to operating profit and net income attributable to Albemarle Corporation, respectively, the most directly comparable financial measures calculated and reported in accordance with GAAP.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
| Total segment operating profit |
$ | 246,060 | $ | 335,210 | ||||
| Add (less): |
||||||||
| Corporate & other(a) |
(35,744 | ) | (49,960 | ) | ||||
| Restructuring and other charges |
(11,643 | ) | (25,789 | ) | ||||
| Port de Bouc facility disposition charges |
(12,393 | ) | (38,544 | ) | ||||
| GAAP Operating profit |
$ | 186,280 | $ | 220,917 | ||||
| Total segment income |
$ | 257,133 | $ | 339,892 | ||||
| Add (less): |
||||||||
| Corporate & other |
(35,750 | ) | (50,322 | ) | ||||
| Restructuring and other charges |
(11,643 | ) | (25,789 | ) | ||||
| Port de Bouc facility disposition charges |
(12,393 | ) | (38,544 | ) | ||||
| Interest and financing expenses |
(24,584 | ) | (38,175 | ) | ||||
| Other (expenses) income, net |
(1,423 | ) | 601 | |||||
| Income tax benefit |
7,028 | 6,539 | ||||||
| GAAP Net income attributable to Albemarle Corporation |
$ | 178,368 | $ | 194,202 | ||||
| (a) | Excludes corporate equity income and noncontrolling interest adjustments of $6 and $362 for the years ended December 31, 2009 and 2008, respectively. |
Polymer Solutions
Our Polymer Solutions segment recorded net sales for 2009 of $697.2 million, down $218.3 million, or 24%, versus 2008. This decline was primarily due to lower volumes of 19%, mix of 4%, and unfavorable foreign currency of 1% (mainly strengthening of the U.S. Dollar). The decrease in volumes was primarily in our flame retardants portfolio as a result of softness in the consumer electronics, automotive and construction sectors as well as unfavorable mix. The decrease was also attributable to volume declines in our stabilizers and curatives business due mainly to overall reduced demand in the antioxidants and special intermediates product sectors, as well as unfavorable mix impacts. Polymer Solutions segment income decreased by 31% to $61.4 million for 2009 as compared to 2008 due mainly to lower sales volumes as well as lower production volumes which contributed to unfavorable fixed cost absorption, unfavorable product mix in stabilizers and curatives, and impacts from foreign currency exchange rates due mainly to the stronger U.S. Dollar, partially offset by lower discretionary spending including $15.5 million in lower SG&A/R&D department spending for the segment in connection with our recent cost saving actions.
Catalysts
Our Catalysts segment recorded net sales for 2009 of $808.1 million, down $115.7 million, or 13%, versus 2008. This overall decrease was due mainly to an 8% overall decline in price/mix mainly from lower HPC metals price pass through impacts, offset in part by price/mix gains in FCC refinery catalysts. Also, volume decreases contributed 4% of the net sales decline in the segment, mainly in FCC refinery catalysts due to lower refinery operating rates. Unfavorable foreign currency impacts of 1% were attributable mainly to the strengthening of the U.S. Dollar. Segment income for Catalysts decreased $14.0 million or 9%, to $148.6 million due mainly to price/mix impacts mainly from unfavorable metals price pass through impacts on HPC refinery catalysts, partially offset by
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lower discretionary spending, including $15.0 million in reduced spending for SG&A/R&D departmental costs for the Catalysts segment in connection with our recent cost reduction programs.
Fine Chemistry
Our Fine Chemistry segment recorded net sales for 2009 of $500.1 million, down $127.7 million, or 20%, versus 2008. Of this decrease, 16% was primarily due to lower volumes resulting from overall weak demand in our bromine franchise and our fine chemistry services business, with both businesses directly affected by the global economic downturn seen in 2009. Also, unfavorable price/mix impacts of 3% affected 2009 segment net sales as well as impacts of unfavorable foreign currency exchange rates of 1%, mainly due to the stronger U.S. Dollar. Fine Chemistry segment income for 2009 was $47.1 million, down $41.4 million, or 47%, compared to 2008 due mainly to lower sales volumes and reduced production volumes which also contributed to unfavorable fixed cost absorption. These unfavorable items were partially offset by lower discretionary spending in the segment, including $5.1 million in lower SG&A/R&D department spending in connection with our recent cost reduction programs.
Corporate and Other
For 2009, our Corporate and other expenses decreased $14.6 million, or 29%, to $35.7 million from 2008. This decrease was primarily due to first quarter 2009 adjustments of $7.8 million associated with the reversal of certain long-term employee benefit accruals, of which $7.0 million is included in “Selling, general and administrative expenses” in our consolidated statement of income, as well as other reductions in discretionary spending. Total year 2009 corporate selling, general, and administrative/R&D spending was favorable versus the corresponding 2008 period by $13.3 million based on lower employee related expenses and other discretionary spending savings as a result of our cost reduction efforts.
Summary of Critical Accounting Policies and Estimates
Estimates, Assumptions and Reclassifications
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Listed below are the estimates and assumptions that we consider to be critical in the preparation of our financial statements.
Certain amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to the current presentation.
Recovery of Long-Lived Assets. We evaluate the recovery of our long-lived assets on a reporting unit basis by periodically analyzing our operating results and considering significant events or changes in the business environment.
Income Taxes. We assume the deductibility of certain costs in our income tax filings and estimate the future recovery of deferred tax assets.
Environmental Remediation Liabilities. We estimate and accrue the costs required to remediate a specific site depending on site-specific facts and circumstances. Cost estimates to remediate each specific site are developed by assessing (i) the scope of our contribution to the environmental matter, (ii) the scope of the anticipated remediation and monitoring plan, and (iii) the extent of other parties’ share of responsibility.
Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Revenue Recognition
We recognize sales when the revenue is realized or realizable, and has been earned, in accordance with authoritative accounting guidance. We recognize net sales as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. Significant portions of our sales are sold free on board (FOB) shipping point or on an equivalent basis, and other transactions are based upon specific contractual arrangements. Our standard terms of delivery are generally included in our contracts of sale, order confirmation documents and invoices. We recognize revenue from services when performance of the services has been completed. We have a limited amount of consignment sales that are billed to the customer upon monthly notification of amounts used by the customers under these contracts. Where the Company incurs pre-production design and development costs under long-term supply contracts, these costs are expensed where they relate to the products sold unless contractual guarantees for reimbursement exist. Conversely, these costs are capitalized if they pertain to equipment that we will own and use in producing the products to be supplied and expect to utilize for future revenue generating activities.
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Goodwill and Other Intangible Assets
We account for goodwill and other intangibles acquired in a business combination in conformity with current accounting guidance which requires goodwill and indefinite-lived intangible assets to not be amortized.
We test goodwill for impairment by comparing the estimated fair value of our reporting units to the related carrying value. We measure the fair value based on present value techniques involving future cash flows. Future cash flows include assumptions for sales volumes, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic or market related factors. Significant management judgment is involved in estimating these variables and they include inherent uncertainties since they are forecasting future events. We use a Weighted Average Cost of Capital (WACC) approach to determine our discount rate for goodwill recoverability testing. Our WACC calculation includes factors such as the risk-free rate of return, borrowing costs and expected equity premiums. The factors in this calculation are largely external to our company and, therefore, are beyond our control. We test our recorded goodwill balances for impairment in the fourth quarter of each year or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts.
Definite-lived intangible assets, such as purchased technology, patents, customer lists and trade names, are amortized over their estimated useful lives generally for periods ranging from three to fifty years. We continually evaluate the reasonableness of the useful lives of these assets and test for impairment in accordance with current accounting guidance. See Note 10, “Goodwill and Other Intangibles” to our consolidated financial statements included in Item 8 beginning on page 47.
Pension Plans and Other Postretirement Benefits
Under authoritative accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. As required, we recognize a balance sheet asset or liability for each of the pension or postretirement benefit plans equal to the plan’s funded status as of the measurement date. The primary assumptions are as follows:
| • | Discount Rate—The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. |
| • | Expected Return on Plan Assets—We project the future return on plan assets based on prior performance and future expectations for the types of investments held by the plans as well as the expected long-term allocation of plan assets for these investments. These projected returns reduce the net benefit costs recorded currently. |
| • | Rate of Compensation Increase—For salary-related plans, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement. |
| • | Rate of Increase in the Per Capita Cost of Covered Health Care Benefits—We project the expected increases in the cost of covered health care benefits. |
During 2010, we made changes to the assumptions related to the discount rate, the expected return on plan assets, the rate of compensation increase for salary-related plans, and the rate of increase in the per capita cost of covered health care benefits. We consider available information that we deem relevant when selecting each of these assumptions.
In selecting the discount rates for the U.S. plans, we establish a range of reasonable rates based on methods developed by subject matter experts that reflect current market conditions. For 2010, we relied on methods developed by Citigroup, AonHewitt, and Milliman to establish a range of acceptable discount rates based on authoritative accounting guidance. These methods calculate discount rates based on high-quality bond data and the projected plan cash flows. We believe our selected discount rates accurately reflect market conditions as of the December 31, 2010 measurement date.
In selecting the discount rates for the foreign plans, we relied on AonHewitt methods, including the AonHewitt Top-Quartile and a yield curve derived from fixed-income security yields. The yield curve is generally based on a universe containing Aa-graded corporate bonds in the Euro zone without special features or options, which could affect the duration. In some countries, the yield curve is based on local government bond rates with a premium added to reflect corporate bond risk. Payments we expect to be made from our retirement plans are applied to the resulting yield curve. For each plan, the discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
At December 31, 2010, the weighted-average discount rate was reduced for the pension plans from 5.77% to 5.40% and for the other postretirement plans from 5.70% to 5.30% to reflect market conditions as of the December 31, 2010 measurement date.
In estimating the expected return on plan assets, we consider past performance and future expectations for the types of investments held by the plan as well as the expected long-term allocation of plan assets to these investments. For the year 2010, the weighted-average expected rate of return on domestic pension plan assets was 8.25%, compared to 8.75% for 2009. There has been
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no change to the assumed rate of return on U.S. pension plan assets effective January 1, 2011. Also, there was no change in the weighted-average expected 7.0% return on other postretirement benefit plan assets. Our U.S. defined benefit plan for non-represented employees was closed to new participants effective March 31, 2004. We adopted a defined contribution pension plan for U.S. employees hired after March 31, 2004.
In projecting the rate of compensation increase, we consider past experience in light of movements in inflation rates. At December 31, 2010, the assumed weighted-average rate of compensation increase changed to 3.93% from 3.90% for the pension plans. The assumed weighted-average rate of compensation increase remained unchanged at 4.0% for the other postretirement plans at December 31, 2010.
In selecting the rate of increase in the per capita cost of covered health care benefits, we consider past performance and forecasts of future health care cost trends. At December 31, 2010, the previously assumed ultimate rate of increase in the per capita cost of covered health care benefits for U.S. retirees remained unchanged. For 2011, the assumed trend rate for pre-65 coverage is 7.5% per year, decreasing to an ultimate rate of 5.0% in the year 2019. The 2011 assumed trend rate for post-65 coverage is 12.0% per year, decreasing to an ultimate rate of 5.0% in the year 2020.
A 1% increase or decrease in the U.S. health care cost trend rate would not have a material effect on the benefit obligation and service and interest benefit cost components.
A variance in the assumptions discussed above would have an impact on the projected benefit obligations, the accrued other postretirement benefit liabilities, and the annual net periodic pension and other postretirement benefit cost. The following table reflects the sensitivities associated with a hypothetical change in certain assumptions, primarily in the U.S. (in thousands):
| (Favorable) Unfavorable | ||||||||||||||||
| 1% Increase | 1% Decrease | |||||||||||||||
| Increase (Decrease) in Benefit Obligation |
Increase (Decrease) in Benefit Cost |
Increase (Decrease) in Benefit Obligation |
Increase (Decrease) in Benefit Cost |
|||||||||||||
| Actuarial Assumptions |
||||||||||||||||
| Discount Rate: |
||||||||||||||||
| Pension |
$ | (63,231 | ) | $ | (11,152 | ) | $ | 77,401 | $ | 11,442 | ||||||
| Other postretirement benefits |
$ | (5,936 | ) | $ | (800 | ) | $ | 7,064 | $ | 1,000 | ||||||
| Expected return on plan assets: |
||||||||||||||||
| Pension |
* | $ | (6,202 | ) | * | $ | 6,202 | |||||||||
| Other postretirement benefits |
* | $ | (60 | ) | * | $ | 60 | |||||||||
| Rate of increase (decrease) in per capita cost of covered health care benefits |
$ | — | $ | — | $ | — | $ | — | ||||||||
| * | Not applicable. |
Of the $515.0 million total pension and postretirement assets at December 31, 2010, $69.4 million, or 13.5%, are measured using significant unobservable inputs (Level 3). Gains (losses) attributable to these assets are recognized in the consolidated balance sheets as either an increase or decrease in plan assets. See Note 17, “Pension Plans and Other Postretirement Benefits” to our consolidated financial statements included in Item 8 beginning on page 47.
Income Taxes
We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets are also provided for operating losses, capital losses and certain tax credit carryovers. A valuation allowance, reducing deferred tax assets, is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of such deferred tax assets is dependent upon the generation of sufficient future taxable income of the appropriate character. Although realization is not assured, we do not establish a valuation allowance when we believe it is more likely than not that a net deferred tax asset will be realized.
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We only recognize a tax benefit after concluding that it is more likely than not that the benefit will be sustained upon audit by the respective taxing authority based solely on the technical merits of the associated tax position. Once the recognition threshold is met, we recognize a tax benefit measured as the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized. Interest and penalties related to income tax liabilities are included in income tax expense.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008 since the IRS has completed a review of our income tax returns through 2007, or for any U.S. state income tax audit prior to 2001.
With respect to jurisdictions outside the U.S., we are no longer subject to income tax audits for years before 2002. During 2010, we completed a tax audit for one of our Belgian companies for the 2007 tax year. During 2009, we completed the tax audits for the following tax jurisdictions and respective tax years: Belgium, 2007 and 2008 for one Belgian entity, and Germany, 2002 through 2005. No significant tax was assessed as a result of these audits. We were informed in February 2011 that the Belgian tax authorities would commence an audit of one of our Belgian companies for 2009.
While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
Since the timing of resolutions and/or closure of tax audits are uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $0.8 million as a result of closure of tax statutes.
We have designated the undistributed earnings of substantially all of our foreign operations as permanently reinvested and as a result we do not provide for deferred income taxes on the unremitted earnings of these subsidiaries. Our foreign earnings are computed under U.S. federal tax earnings and profits, or E&P, principles. In general, to the extent our financial reporting book basis over tax basis of a foreign subsidiary exceeds these E&P amounts, deferred taxes have not been provided, as they are essentially permanent in duration. The determination of the amount of such unrecognized deferred tax liability is not practicable. We provide for deferred income taxes on our undistributed earnings of foreign operations that are not deemed to be permanently reinvested.
Stock-based Compensation Expense
The fair value of restricted stock awards and performance unit awards is determined based on the number of shares or units granted and the quoted price of our common stock at grant date, and the fair value of stock options is determined using the Black-Scholes valuation model. The fair value of these awards is determined after giving effect to estimated forfeitures. Such value is recognized as expense over the service period, which is generally the vesting period of the equity grant. To the extent restricted stock awards, performance unit awards and stock options are forfeited prior to vesting in excess of the estimated forfeiture rate, the corresponding previously recognized expense is reversed as an offset to operating expenses.
Internal Control Over Financial Reporting
Section 404 of the Sarbanes Oxley Act of 2002, or SOX 404, requires that we make an assertion as to the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K filings. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, provides its assessment of our effectiveness of internal control over financial reporting. In order to make our assertion, we are required to identify material financial and operational processes, document internal controls supporting the financial reporting process and evaluate the design and effectiveness of these controls. See “Management’s Report on Internal Control Over Financial Reporting” in Item 8.
We have a dedicated SOX 404 team to facilitate ongoing internal control testing, provide direction to the business groups and corporate staff in their control processes and assist in the overall assessment of internal control over financial reporting. Status and updates are provided to executive management and our Audit Committee of our Board of Directors on an ongoing basis. We also retain accounting firms other than our independent registered public accounting firm to assist us in our compliance with SOX 404.
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Our SOX 404 effort involves many of our employees around the world, including participation by our business and functional groups. We view our ongoing evaluation of our internal control over financial reporting as more than a regulatory exercise—it provides us an opportunity to continually assess our financial control environment and make us a more effective company.
Financial Condition and Liquidity
Overview
The principal uses of cash in our business generally have been investment in our assets, funding working capital and repayment of debt. Also, in 2010 we made $80.1 million in total contributions to our defined benefit pension and postretirement plans, and we made approximately $40.0 million in total contributions to these plans in each of 2009 and 2008. Historically, cash to fund the needs of our business has been principally provided by funds from operations, debt financing and equity issuances.
We are continuing our program to improve working capital efficiency and working capital metrics particularly in the areas of accounts receivable and inventory. We expect the combination of our current cash balances and availability under our March 2007 credit agreement, which is discussed below, to remain sufficient to fund working capital requirements for the foreseeable future.
Cash Flow
Our cash and cash equivalents increased by $220.9 million to $529.7 million at December 31, 2010 as compared to our ending balance at December 31, 2009 of $308.8 million. Our cash flows from operations provided $331.3 million, $358.5 million and $327.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The decrease in cash flows from operations in 2010 versus 2009 of $27.2 million was primarily due to an increase in working capital (mainly inventories and accounts receivable in connection with the global economic recovery) and pension contributions, offset in part by the strong increase in profitability of our businesses. The increase of $31.3 million in operating cash flows for 2009 compared to 2008 was due primarily to working capital reduction programs put in place during the 2009 economic downturn, partially offset by corresponding decreases in profitability.
In 2010, our operating cash flows funded capital expenditures for plant machinery and equipment of $75.5 million, dividends to shareholders of $49.6 million, repurchases of common stock of $14.9 million and normal debt repayments during the year. Additionally, our cash balances in 2010 were unfavorably impacted $12.6 million as a result of the January 1, 2010 deconsolidation of our Stannica LLC joint venture. Further, we raised approximately $473 million in borrowings in 2010, including $346.9 million in net proceeds from our 4.5% senior notes offering in December 2010. In the fourth quarter 2010, we used the collective proceeds of these borrowings to pay down $308.0 million in outstanding borrowings on our March 2007 credit agreement, fund a contribution of $50.0 million to our domestic qualified pension plans and for other general corporate purposes. In January 2011, we funded another contribution of $50.0 million to our domestic qualified pension plans from the proceeds of these borrowings.
Our cash flows from operations in 2009 were used mainly for funding capital expenditures of $100.8 million for plant machinery and equipment, $120.0 million in net repayments of debt, $44.4 million in dividends to shareholders and $16.4 million in obligations arising from the 2008 Port de Bouc facility divestiture. For the year 2008, our cash flows from operating activities funded investing activities of $163.7 million, which consisted principally of capital expenditures for plant machinery and equipment and acquisitions. Our remaining operating cash flows in 2008 were combined with net proceeds from borrowings of $207.1 million to repurchase $169.0 million of our common stock, dividends to shareholders totaling $42.3 million and for other corporate uses.
Net current assets increased $305.2 million to $984.0 million at December 31, 2010 from $678.8 million at December 31, 2009. The increase in net current assets was due primarily to increases in cash and cash equivalents, accounts receivable, inventory and a decrease in the current portion of long-term debt, partially offset by increases in income taxes payable and accrued expenses.
Capital expenditures were $75.5 million, $100.8 million and $99.7 million for the years ended December 31, 2010, 2009 and 2008, respectively, and were incurred mainly for plant machinery and equipment. We expect our capital expenditures to be approximately $150 million in 2011 for capacity increase, cost reduction, and continuity of operations projects.
While we continue to closely monitor our cash generation, working capital management and capital spending in light of the recent economic downturn seen in 2009, we are confident that as we enter into 2011 we will have the financial flexibility and capability to opportunistically fund future growth initiatives. Additionally, we anticipate that future capital spending should be financed primarily with cash flow provided from operations with additional cash needed, if any, provided by borrowings, including borrowings under our March 2007 credit agreement. The amount and timing of any additional borrowings will depend on our specific cash requirements.
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Long-Term Debt
We currently have outstanding $325.0 million of 5.10% senior notes due in 2015 and $350.0 million of 4.50% senior notes due in 2020, or the senior notes. The senior notes are senior unsecured obligations and rank equally with all of our other senior unsecured indebtedness from time to time outstanding. The senior notes will be effectively subordinated to any of our future secured indebtedness and to the existing and future indebtedness of our subsidiaries. We may redeem the senior notes before their maturity, in whole at any time or in part from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of the senior notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis using the Treasury Rate (as defined in the indenture governing the senior notes) plus 15 basis points for the senior notes maturing in 2015 and 25 basis points for the senior notes maturing in 2020, plus, in each case, accrued interest thereon to the date of redemption. However, the 2020 senior notes are redeemable as a whole or in part, at our option, at any time on or after three months prior to the maturity date, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed plus accrued and unpaid interest on the senior notes to be redeemed to the date of redemption. Holders of the 2020 senior notes may require us to purchase such notes at 101% upon a Change of Control Triggering Event, as defined in the related indenture agreement.
The principal amount of the senior notes becomes immediately due and payable upon the occurrence of certain bankruptcy or insolvency events involving us or certain of our subsidiaries and may be declared immediately due and payable by the trustee or the holders of not less than 25% of the senior notes upon the occurrence of an event of default. Events of default include, among other things: failure to pay principal or interest at required times; failure to perform or remedy a breach of covenants within prescribed periods; an event of default on any of our other indebtedness or certain indebtedness of our subsidiaries of $40.0 million or more that is caused by a failure to make a payment when due or that results in the acceleration of that indebtedness before its maturity; and certain bankruptcy or insolvency events involving us or certain of our subsidiaries. We believe that as of December 31, 2010, we were, and currently are, in compliance with all of the covenants of the indentures governing the senior notes.
For additional funding and liquidity purposes, we currently maintain a $675.0 million five-year unsecured revolving senior credit facility, which we refer to as the March 2007 credit agreement. The March 2007 credit agreement provides for an additional $200.0 million in credit upon additional loan commitments by our existing and/or additional lenders. The total spread and fees can range from 0.32% to 0.675% over the London Inter-Bank Offered Rate, or LIBOR, applicable to the currency of the borrowing and are based on our credit rating as determined by the major rating agencies. There were no borrowings outstanding under the March 2007 credit agreement at December 31, 2010. Borrowings under the March 2007 credit agreement bear interest at a variable rate, which was a weighted average of 0.61% during the three-month period ended December 31, 2010.
In March 2008, we exercised an option under the March 2007 credit agreement to extend the maturity date from March 2012 to March 2013. Lenders representing 87.4% of the commitments, or $590 million out of $675 million, approved the extension. No other changes to the agreement were part of the extension, and no fees, other than attorney fees, were paid. As a result of the extension, $85 million and $590 million in commitments now have a maturity date of March 2012 and March 2013, respectively.
Borrowings under our March 2007 credit agreement are conditioned upon compliance with the following covenants: (i) consolidated funded debt, as defined in the March 2007 credit agreement, must be less than or equal to 3.50 times consolidated EBITDA, as defined in the March 2007 credit agreement, as of the end of any fiscal quarter; (ii) consolidated tangible domestic assets, as defined in the March 2007 credit agreement, must be greater than or equal to $750.0 million for us to make investments in entities and enterprises that are organized outside the U.S.; and (iii) with the exception of liens specified in our March 2007 credit agreement, liens may not attach to assets when the aggregate amount of all indebtedness secured by such liens plus unsecured subsidiary indebtedness, other than indebtedness incurred by our subsidiaries under the March 2007 credit agreement would exceed 20% of consolidated net worth, as defined in the March 2007 credit agreement. We believe that as of December 31, 2010, we were, and currently are, in compliance with all of the debt covenants under the March 2007 credit agreement.
The non-current portion of our long-term debt amounted to $851.9 million at December 31, 2010, compared to $776.4 million at December 31, 2009. At December 31, 2010, we had the ability to borrow an additional $675.0 million under our March 2007 credit agreement and $116.3 million under other existing lines of credit. We have the ability to refinance our borrowings under these credit lines under our March 2007 credit agreement, as applicable. Therefore, these amounts are classified as long-term debt.
Off-Balance Sheet Arrangements
In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, including bank guarantees and letters of credit which totaled approximately $34.2 million at December 31, 2010. None of these off-balance sheet arrangements either has, or is likely to have, a material effect on our current or future financial condition, results of operations, liquidity or capital resources.
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Other Obligations
The following table summarizes our projected contractual obligations for plant construction, purchases of equipment, various take or pay and throughput agreements and obligations under our existing credit agreements based on projected borrowings (in thousands):
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||
| Long-term debt obligations |
$ | 5,123 | $ | 10,659 | $ | 153,357 | $ | 6,009 | $ | 327,066 | $ | 356,087 | ||||||||||||
| Capital lease obligation |
3,860 | 2,013 | — | — | — | — | ||||||||||||||||||
| Expected interest payments on long-term debt obligations* |
36,940 | 36,777 | 33,870 | 32,653 | 18,558 | 78,072 | ||||||||||||||||||
| Operating lease obligations (rental) |
8,676 | 6,143 | 3,963 | 2,833 | 2,341 | 12,159 | ||||||||||||||||||
| Take or pay / throughput agreements** |
36,868 | 11,276 | 10,612 | 9,043 | 8,131 | 7,690 | ||||||||||||||||||
| Letters of credit and guarantees |
19,803 | 1,807 | 7,004 | — | — | 5,621 | ||||||||||||||||||
| Capital projects |
30,847 | 722 | — | — | — | — | ||||||||||||||||||
| Total |
$ | 142,117 | $ | 69,397 | $ | 208,806 | $ | 50,538 | $ | 356,096 | $ | 459,629 | ||||||||||||
| * | These amounts are based on a weighted-average interest rate of 5.1% for the 2015 senior notes, 4.5% for the 2020 senior notes, and 4.6% for our remaining long-term debt obligations and capital lease for 2011. The weighted average rate for years 2012 and thereafter is 5.1% for the 2015 senior notes, 4.5% for the 2020 senior notes and 5.5% for our remaining long-term debt obligations and capital lease. Interest payments on our variable-rate foreign bank loans are calculated through March 2013 when our credit agreement expires. |
| ** | These amounts primarily relate to contracts entered into with certain third party vendors in the normal course of business to secure raw materials for our production processes. In order to secure materials, sometimes for long durations, these contracts mandate a minimum amount of product to be purchased at predetermined rates over a set timeframe. |
Amounts in the table above exclude required employer pension contributions. We have determined that the expected 2011 contributions to our domestic and foreign qualified and nonqualified pension plans should approximate $54.6 million. We may choose to make additional pension contributions in excess of this amount. We have made $76.8 million in contributions to our qualified and nonqualified pension plans during the year ended December 31, 2010.
The liability related to uncertain tax positions, including interest and penalties, recorded in “Other Noncurrent Liabilities” totaled $21.9 million and $22.3 million at December 31, 2010 and 2009, respectively. Related assets for corresponding offsetting benefits recorded in “Other Assets” totaled $12.3 million and $14.9 million at December 31, 2010 and 2009, respectively. We cannot estimate the amounts of any cash payments during the next twelve months associated with these liabilities and are unable to estimate the timing of any such cash payments in the future at this time.
Liquidity Outlook
We anticipate that cash provided by operating activities and borrowing capacity under our March 2007 credit agreement will be sufficient to pay our operating expenses, satisfy debt service obligations, fund capital expenditures, make pension contributions and make dividend payments for the foreseeable future. In addition, as we have historically done, we will continue to evaluate the merits of any opportunities that may arise for acquisitions of businesses or assets, which may require additional liquidity.
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, renew their extensions of credit or provide new financing. While the corporate bond market remains strong, availability of bank debt is far more limited than prior to the market disruptions of 2008 and 2009, which severely impacted many financial institutions. If bank debt remains relatively less prevalent, we may incur increased borrowing costs and reduced credit capacity as our various credit facilities mature. It is also possible that our ability to access the capital markets may be limited by market or counterparty factors at a time when we would need or desire to do so, which could have an impact on our ability to finance our businesses or react to changing economic and business conditions. In addition, 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.
At December 31, 2010, we had the ability to borrow in excess of $791.3 million under our March 2007 credit agreement and other existing lines of credit, subject to various financial covenants under our March 2007 credit agreement. With generally strong cash generative businesses and no significant debt maturities before 2013, we believe we have and will maintain a solid liquidity position.
We had cash and cash equivalents totaling $529.7 million as of December 31, 2010, which represent an important source of our liquidity. Our cash is invested in short-term investments including time deposits and readily marketable securities with relatively short maturities.
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Safety and Environmental Matters
We are subject to federal, state, local and foreign requirements regulating the handling, manufacture and use of materials (some of which may be classified as hazardous or toxic by one or more regulatory agencies), the discharge of materials into the environment and the protection of the environment. To our knowledge, we are currently complying and expect to continue to comply in all material respects with applicable environmental laws, regulations, statutes and ordinances. Compliance with existing federal, state, local, and foreign environmental protection laws is not expected to have a material effect on earnings or our competitive position, but the costs associated with increased legal or regulatory requirements could have an adverse effect on our results.
Among other environmental requirements, we are subject to the federal Superfund law, and similar state laws, under which we may be designated as a PRP, and may be liable for a share of the costs associated with cleaning up various hazardous waste sites. Management believes that in cases in which we may have liability as a PRP, our liability for our share of cleanup is de minimis. Further, almost all such sites represent environmental issues that are quite mature and have been investigated, studied and in many cases settled. In de minimis situations, our policy generally is to negotiate a consent decree and to pay any apportioned settlement, enabling us to be effectively relieved of any further liability as a PRP, except for remote contingencies. In other than de minimis PRP matters, our records indicate that unresolved PRP exposures should be immaterial. We accrue and expense our proportionate share of PRP costs. Because management has been actively involved in evaluating environmental matters, we are able to conclude that the outstanding environmental liabilities for unresolved PRP sites should not be material to our operations.
Our environmental and safety operating costs charged to expense were $34.8 million, $36.3 million and $41.6 million in 2010, 2009 and 2008, respectively, excluding depreciation of previous capital expenditures, and are expected to be in the same range in the next few years. Costs for remediation have been accrued and payments related to sites are charged against accrued liabilities, which at December 31, 2010 totaled approximately $13.8 million, down $1.8 million from $15.6 million at December 31, 2009.
We believe that any sum we may be required to pay in connection with environmental remediation and asset retirement obligation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis, although any such sum could have a material adverse impact on our results of operations, financial condition or cash flows in a particular quarterly reporting period. See also Item 3. “Legal Proceedings” on page 21.
Capital expenditures for pollution-abatement and safety projects, including such costs that are included in other projects, were approximately $7.8 million, $11.4 million and $21.4 million in 2010, 2009 and 2008, respectively. In the future, capital expenditures for these types of projects may increase due to more stringent environmental regulatory requirements and our efforts in reaching sustainability goals. Management’s estimates of the effects of compliance with governmental pollution-abatement and safety regulations are subject to (i) the possibility of changes in the applicable statutes and regulations or in judicial or administrative construction of such statutes and regulations, and (ii) uncertainty as to whether anticipated solutions to pollution problems will be successful, or whether additional expenditures may prove necessary.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued new accounting guidance relating to separating consideration in multiple-deliverable revenue arrangements. Under this guidance, multiple-deliverable arrangements will be accounted for separately (rather than on a combined basis) by selecting the best evidence of selling price among vendor-specific objective evidence, third-party evidence or estimated selling price. The guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect this new guidance to have a material effect on our consolidated financial statements.
In January 2010, new accounting guidance was issued by the FASB that requires additional disclosures about amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons therefore. Additionally, entities are now required to present separately information about purchases, sales, issuances and settlements in the reconciliation of fair value measurements using significant unobservable (Level 3) inputs. The amendments also clarified that entities should provide fair value measurement disclosures for each class, or subset, of assets or liabilities within a line item in the statement of financial position, and entities should disclose information about inputs and valuation techniques for Level 2 and Level 3 fair value measurements, whether recurring or nonrecurring. These amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of fair value measurements using Level 3 inputs, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The provisions of this guidance that became effective for us January 1, 2010 did not have a material effect on our consolidated financial statements. We are currently evaluating the potential impact of the provisions that will be effective for us January 1, 2011 but do not expect that they will have a material effect on our consolidated financial statements.
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
The primary currencies to which we have foreign currency exchange rate exposure are the European Union Euro, Japanese Yen, British Pound Sterling, Korean Won, Chinese Renminbi and the U.S. Dollar (in certain of our foreign locations). In response to greater fluctuations in foreign currency exchange rates in recent periods, we have increased the degree of exposure risk management activities to minimize the potential impact on earnings.
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies and through the use from time to time of foreign currency forward contracts. The principal objective of such contracts is to minimize the risks and/or costs associated with global operating activities. The counterparties to these contractual agreements are major financial institutions with which we generally have other financial relationships. We are exposed to credit loss in the event of nonperformance by these counterparties. However, we do not anticipate nonperformance by the counterparties. We do not utilize financial instruments for trading or other speculative purposes.
The primary method we use to reduce foreign currency exposure is to identify natural hedges, in which the operating activities denominated in respective currencies across various subsidiaries balance in respect to timing and the underlying exposures. In the event a natural hedge is not available, we may employ a forward contract to reduce exposure, generally expiring within one year. While these contracts are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. Gains and losses on foreign currency forward contracts are recognized currently in income but do not have a significant impact on results of operations.
Our financial instruments, subject to foreign currency exchange risk, consist of foreign currency forward contracts and represented a net liability position of $4.9 million at December 31, 2010. We conducted a sensitivity analysis on the fair value of our foreign currency hedge portfolio assuming an instantaneous 10% change in select exchange rates from their levels as of December 31, 2010, with all other variables held constant. A 10% appreciation of the U.S. Dollar against foreign currencies that we hedge would result in a decrease of $16.4 million in the fair value of our hedging contracts. A 10% depreciation of the U.S. Dollar against foreign currencies that we hedge would result in an increase of $11.3 million in the fair value of our hedging contracts. The sensitivity in fair value of our foreign currency hedge portfolio represents changes in fair values estimated based on market conditions as of December 31, 2010, without reflecting the underlying monetary exposures the portfolio is hedging. The effects of exchange movements on those anticipated transactions would be expected to mitigate the impacts implied by our sensitivity analysis.
We are exposed to changes in interest rates that could impact our results of operations and financial condition. We manage global interest rate and foreign exchange exposure as part of our regular operational and financing strategies. We had outstanding variable interest rate borrowings of $149.5 million and $439.2 million at December 31, 2010 and 2009, respectively. These borrowings represented 17% and 54% of total outstanding debt and bore average interest rates of 2.25% and 0.83% at December 31, 2010 and 2009, respectively. A hypothetical 10% change (approximately 23 basis points) in the average interest rate applicable to these borrowings would change our annualized interest expense by approximately $0.3 million as of December 31, 2010. We may enter into interest rate swaps, collars or similar instruments with the objective of reducing interest rate volatility relating to our borrowing costs. The current credit spreads provided for under the March 2007 credit agreement, which were negotiated prior to the recent global recession, will likely not be obtainable in the event that we would need to refinance our credit facilities.
Our raw materials are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. Historically, we have not used futures, options or swap contracts to manage the volatility related to the above exposures. However, the refinery catalysts business has used financing arrangements to provide long-term protection against changes in metals prices. We seek to limit our exposure by entering into long-term contracts when available, and we seek price increase limitations through contracts. These contracts do not have a significant impact on our results of operations.
In addition, certain of our operations use natural gas as a source of energy which can expose our business to market risk when the price of natural gas changes suddenly. In an attempt to mitigate the impact and volatility of price swings in the natural gas market, from time to time we enter into natural gas hedge contracts with one or more major financial institutions for a portion of our 12-month rolling forecast for North American natural gas requirements. Such derivatives are held to secure natural gas at fixed prices and are not entered into for trading purposes. At December 31, 2010 and 2009, we had no natural gas hedge contracts outstanding.
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| Item 8. | Financial Statements and Supplementary Data. |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with management’s and our directors’ authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
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 our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria for effective internal control over financial reporting described in the “Internal Control-Integrated Framework” set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the Unites States. The conclusion of our principal executive officer and principal financial officer is based on the recognition that there are inherent limitations in all systems of internal control. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
| /S/ MARK C. ROHR | /S/ SCOTT A. TOZIER | |
| Mark C. Rohr | Scott A. Tozier | |
| Chairman of the Board and Chief Executive Officer (principal executive officer) |
Senior Vice President, Chief Financial Officer (principal financial officer) | |
| February 25, 2011 | February 25, 2011 | |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Albemarle Corporation:
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Albemarle Corporation and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
In 2009, the Company changed the manner in which it accounts for noncontrolling interests and earnings per share as discussed in Note 1, “Summary of Significant Accounting Policies” and Note 3 “Earnings Per Share,” respectively.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /S/ PricewaterhouseCoopers LLP |
| New Orleans, Louisiana |
| February 25, 2011 |
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Albemarle Corporation and Subsidiaries
(In Thousands)
| December 31 | 2010 | 2009 | ||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 529,650 | $ | 308,791 | ||||
| Trade accounts receivable, less allowance for doubtful accounts (2010—$2,527; 2009—$2,254) |
340,888 | 294,192 | ||||||
| Other accounts receivable |
33,772 | 35,023 | ||||||
| Inventories: |
||||||||
| Finished goods |
279,365 | 241,127 | ||||||
| Raw materials |
66,645 | 62,991 | ||||||
| Stores, supplies and other |
43,200 | 43,388 | ||||||
| 389,210 | 347,506 | |||||||
| Other current assets |
54,678 | 46,575 | ||||||
| Total current assets |
1,348,198 | 1,032,087 | ||||||
| Property, plant and equipment, at cost |
2,440,178 | 2,406,129 | ||||||
| Less accumulated depreciation and amortization |
1,433,865 | 1,379,246 | ||||||
| Net property, plant and equipment |
1,006,313 | 1,026,883 | ||||||
| Investments |
180,690 | 146,084 | ||||||
| Other assets |
125,878 | 123,259 | ||||||
| Goodwill |
272,238 | 292,721 | ||||||
| Other intangibles, net of amortization |
134,764 | 150,523 | ||||||
| Total assets |
$ | 3,068,081 | $ | 2,771,557 | ||||
| Liabilities and Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 175,183 | $ | 170,287 | ||||
| Current portion of long-term debt |
8,983 | 36,310 | ||||||
| Accrued expenses |
143,684 | 133,268 | ||||||
| Dividends payable |
12,547 | 11,006 | ||||||
| Income taxes payable |
23,780 | 2,393 | ||||||
| Total current liabilities |
364,177 | 353,264 | ||||||
| Long-term debt |
851,927 | 776,403 | ||||||
| Postretirement benefits |
55,014 | 53,851 | ||||||
| Pension benefits |
102,836 | 148,498 | ||||||
| Other noncurrent liabilities |
108,811 | 104,782 | ||||||
| Deferred income taxes |
109,570 | 81,441 | ||||||
| Commitments and contingencies (Note 15) |
||||||||
| Equity: |
||||||||
| Albemarle Corporation shareholders’ equity: |
||||||||
| Common stock, $.01 par value (authorized 150,000 shares) issued and outstanding—91,594 in 2010 and 91,509 in 2009 |
916 | 915 | ||||||
| Additional paid-in capital |
18,835 | 8,658 | ||||||
| Accumulated other comprehensive loss |
(164,196 | ) | (91,860 | ) | ||||
| Retained earnings |
1,560,519 | 1,287,983 | ||||||
| Total Albemarle Corporation shareholders’ equity |
1,416,074 | 1,205,696 | ||||||
| Noncontrolling interests |
59,672 | 47,622 | ||||||
| Total equity |
1,475,746 | 1,253,318 | ||||||
| Total liabilities and equity |
$ | 3,068,081 | $ | 2,771,557 | ||||
See accompanying notes to the consolidated financial statements.
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Albemarle Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
| Year Ended December 31 | 2010 | 2009 | 2008 | |||||||||
| Net sales |
$ | 2,362,764 | $ | 2,005,394 | $ | 2,467,115 | ||||||
| Cost of goods sold |
1,616,842 | 1,521,532 | 1,859,441 | |||||||||
| Gross profit |
745,922 | 483,862 | 607,674 | |||||||||
| Selling, general and administrative expenses |
265,722 | 212,628 | 255,132 | |||||||||
| Research and development expenses |
58,394 | 60,918 | 67,292 | |||||||||
| Restructuring and other charges |
6,958 | 11,643 | 25,789 | |||||||||
| Port de Bouc facility disposition charges |
— | 12,393 | 38,544 | |||||||||
| Operating profit |
414,848 | 186,280 | 220,917 | |||||||||
| Interest and financing expenses |
(25,533 | ) | (24,584 | ) | (38,175 | ) | ||||||
| Other income (expenses), net |
2,788 | (1,423 | ) | 601 | ||||||||
| Income before income taxes and equity in net income of unconsolidated investments |
392,103 | 160,273 | 183,343 | |||||||||
| Income tax expense (benefit) |
92,719 | (7,028 | ) | (6,539 | ) | |||||||
| Income before equity in net income of unconsolidated investments |
299,384 | 167,301 | 189,882 | |||||||||
| Equity in net income of unconsolidated investments (net of tax) |
37,975 | 22,322 | 23,126 | |||||||||
| Net income |
$ | 337,359 | $ | 189,623 | $ | 213,008 | ||||||
| Net income attributable to noncontrolling interests |
(13,639 | ) | (11,255 | ) | (18,806 | ) | ||||||
| Net income attributable to Albemarle Corporation |
$ | 323,720 | $ | 178,368 | $ | 194,202 | ||||||
| Basic earnings per share |
$ | 3.54 | $ | 1.95 | $ | 2.12 | ||||||
| Diluted earnings per share |
$ | 3.51 | $ | 1.94 | $ | 2.09 | ||||||
| Weighted-average common shares outstanding – basic |
91,393 | 91,512 | 91,657 | |||||||||
| Weighted-average common shares outstanding – diluted |
92,184 | 92,046 | 92,741 | |||||||||
| Cash dividends declared per share of common stock |
$ | 0.56 | $ | 0.50 | $ | 0.48 | ||||||
See accompanying notes to the consolidated financial statements.
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Albemarle Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In Thousands, Except Share Data)
| Common Stock | Additional Paid in |
Accumulated Other Comprehensive |
Retained | Total Albemarle Shareholders’ |
Noncontrolling | Total | ||||||||||||||||||||||||||
| Shares | Amounts | Capital | Income (Loss) | Earnings | Equity | Interests | Equity | |||||||||||||||||||||||||
| Balance at January 1, 2008 |
94,733,720 | $ | 947 | $ | 154,451 | $ | 99,885 | $ | 1,023,022 | $ | 1,278,305 | $ | 54,361 | $ | 1,332,666 | |||||||||||||||||
| Comprehensive (loss) income: |
||||||||||||||||||||||||||||||||
| Net income for 2008 |
194,202 | 194,202 | 18,806 | 213,008 | ||||||||||||||||||||||||||||
| Remaining interest acquisition |
(6,331 | ) | (6,331 | ) | ||||||||||||||||||||||||||||
| Foreign currency translation |
(71,856 | ) | (71,856 | ) | (71,856 | ) | ||||||||||||||||||||||||||
| Amortization of realized loss on treasury lock agreements (net of deferred tax of $78) |
139 | 139 | 139 | |||||||||||||||||||||||||||||
| Change in unrealized gain on marketable equity securities (net of deferred tax of $3) |
(5 | ) | (5 | ) | (5 | ) | ||||||||||||||||||||||||||
| Amortization of prior service benefit, net transition asset and net loss included in net periodic benefit cost |
(1,679 | ) | (1,679 | ) | (1,679 | ) | ||||||||||||||||||||||||||
| Net prior service loss arising during period |
(393 | ) | (393 | ) | (393 | ) | ||||||||||||||||||||||||||
| Net benefit plan loss arising during period |
(126,733 | ) | (126,733 | ) | (126,733 | ) | ||||||||||||||||||||||||||
| Total comprehensive (loss) income |
(200,527 | ) | 194,202 | (6,325 | ) | 12,475 | 6,150 | |||||||||||||||||||||||||
| Cash dividends declared for 2008 |
(43,819 | ) | (43,819 | ) | (16,525 | ) | (60,344 | ) | ||||||||||||||||||||||||
| Stock-based compensation and other |
13,669 | 13,669 | 13,669 | |||||||||||||||||||||||||||||
| Exercise of stock options |
312,334 | 3 | 3,928 | 3,931 | 3,931 | |||||||||||||||||||||||||||
| Shares repurchased and retired |
(4,662,700 | ) | (47 | ) | (161,003 | ) | (7,902 | ) | (168,952 | ) | (168,952 | ) | ||||||||||||||||||||
| Tax benefit related to stock plans |
372 | 372 | 372 | |||||||||||||||||||||||||||||
| Issuance of common stock, net |
904,400 | 10 | (9 | ) | 1 | 1 | ||||||||||||||||||||||||||
| Acquisitions |
401 | 401 | ||||||||||||||||||||||||||||||
| Shares withheld for withholding taxes associated with common stock issuances |
(307,445 | ) | (3 | ) | (11,408 | ) | (11,411 | ) | (11,411 | ) | ||||||||||||||||||||||
| Balance at December 31, 2008 |
90,980,309 | $ | 910 | $ | — | $ | (100,642 | ) | $ | 1,165,503 | $ | 1,065,771 | $ | 50,712 | $ | 1,116,483 | ||||||||||||||||
| Balance at January 1, 2009 |
90,980,309 | $ | 910 | $ | — | $ | (100,642 | ) | $ | 1,165,503 | $ | 1,065,771 | $ | 50,712 | $ | 1,116,483 | ||||||||||||||||
| Comprehensive income (loss): |
||||||||||||||||||||||||||||||||
| Net income for 2009 |
178,368 | 178,368 | 11,255 | 189,623 | ||||||||||||||||||||||||||||
| Foreign currency translation |
34,272 | 34,272 | 34,272 | |||||||||||||||||||||||||||||
| Amortization of realized loss on treasury lock agreements (net of deferred tax of $82) |
135 | 135 | 135 | |||||||||||||||||||||||||||||
| Change in unrealized loss on marketable equity securities |
1 | 1 | 1 | |||||||||||||||||||||||||||||
| Amortization of prior service benefit, net transition asset and net loss included in net periodic benefit cost (net of deferred tax of $1,649) |
3,229 | 3,229 | 3,229 | |||||||||||||||||||||||||||||
| Net benefit plan loss arising during period |
(28,317 | ) | (28,317 | ) | (28,317 | ) | ||||||||||||||||||||||||||
| Other (net of deferred tax of $366) |
(538 | ) | (538 | ) | (538 | ) | ||||||||||||||||||||||||||
| Total comprehensive income |
8,782 | 178,368 | 187,150 | 11,255 | 198,405 | |||||||||||||||||||||||||||
| Cash dividends declared for 2009 |
(45,763 | ) | (45,763 | ) | (14,681 | ) | (60,444 | ) | ||||||||||||||||||||||||
| Stock-based compensation and other |
8,730 | (5,582 | ) | 3,148 | 3,148 | |||||||||||||||||||||||||||
| Exercise of stock options |
341,666 | 3 | 4,150 | 4,153 | 4,153 | |||||||||||||||||||||||||||
| Shares repurchased and retired |
(174,900 | ) | (2 | ) | (5,810 | ) | (5,812 | ) | (5,812 | ) | ||||||||||||||||||||||
| Tax benefit related to stock plans |
2,111 | 2,111 | 2,111 | |||||||||||||||||||||||||||||
| Issuance of common stock, net |
584,015 | 6 | (6 | ) | — | — | ||||||||||||||||||||||||||
| Acquisitions |
— | 336 | 336 | |||||||||||||||||||||||||||||
| Shares withheld for withholding taxes associated with common stock issuances |
(221,991 | ) | (2 | ) | (517 | ) | (4,543 | ) | (5,062 | ) | (5,062 | ) | ||||||||||||||||||||
| Balance at December 31, 2009 |
91,509,099 | $ | 915 | $ | 8,658 | $ | (91,860 | ) | $ | 1,287,983 | $ | 1,205,696 | $ | 47,622 | $ | 1,253,318 | ||||||||||||||||
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Albemarle Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
(In Thousands, Except Share Data)
| Common Stock | Additional Paid in |
Accumulated Other Comprehensive |
Retained | Total Albemarle Shareholders’ |
Noncontrolling | Total | ||||||||||||||||||||||||||
| Shares | Amounts | Capital | Income (Loss) | Earnings | Equity | Interests | Equity | |||||||||||||||||||||||||
| Balance at January 1, 2010 |
91,509,099 | $ | 915 | $ | 8,658 | $ | (91,860 | ) | $ | 1,287,983 | $ | 1,205,696 | $ | 47,622 | $ | 1,253,318 | ||||||||||||||||
| Comprehensive income (loss): |
||||||||||||||||||||||||||||||||
| Net income for 2010 |
323,720 | 323,720 | 13,639 | 337,359 | ||||||||||||||||||||||||||||
| Foreign currency translation |
(62,629 | ) | (62,629 | ) | (62,629 | ) | ||||||||||||||||||||||||||
| Amortization of realized loss on treasury lock agreements (net of deferred tax of $80) |
136 | 136 | 136 | |||||||||||||||||||||||||||||
| Change in unrealized loss on marketable equity securities (net of deferred tax of $0) |
1 | 1 | 1 | |||||||||||||||||||||||||||||
| Amortization of prior service benefit, net transition asset and net loss included in net periodic benefit cost net of deferred tax of $5,992) |
10,407 | 10,407 | 10,407 | |||||||||||||||||||||||||||||
| Net prior service loss arising during period |
(181 | ) | (181 | ) | (181 | ) | ||||||||||||||||||||||||||
| Net benefit plan loss arising during period |
(20,038 | ) | (20,038 | ) | (20,038 | ) | ||||||||||||||||||||||||||
| Other (net of deferred tax of $22) |
(32 | ) | (32 | ) | (32 | ) | ||||||||||||||||||||||||||
| Total comprehensive income |
(72,336 | ) | 323,720 | 251,384 | 13,639 | 265,023 | ||||||||||||||||||||||||||
| Deconsolidation of Stannica LLC |
(8,121 | ) | (8,121 | ) | ||||||||||||||||||||||||||||
| Cumulative dividend adjustment on JBC noncontrolling interest |
8,017 | 8,017 | ||||||||||||||||||||||||||||||
| Cash dividends declared for 2010 |
(51,184 | ) | (51,184 | ) | (1,485 | ) | (52,669 | ) | ||||||||||||||||||||||||
| Stock-based compensation and other |
13,995 | 13,995 | 13,995 | |||||||||||||||||||||||||||||
| Exercise of stock options |
494,559 | 5 | 7,130 | 7,135 | 7,135 | |||||||||||||||||||||||||||
| Shares repurchased and retired |
(400,356 | ) | (4 | ) | (14,941 | ) | (14,945 | ) | (14,945 | ) | ||||||||||||||||||||||
| Tax benefit related to stock plans |
7,981 | 7,981 | 7,981 | |||||||||||||||||||||||||||||
| Issuance of common stock, net |
81,864 | 1 | (1 | ) | — | — | ||||||||||||||||||||||||||
| Shares withheld for withholding taxes associated with common stock issuances |
(91,182 | ) | (1 | ) | (3,987 | ) | (3,988 | ) | (3,988 | ) | ||||||||||||||||||||||
| Balance at December 31, 2010 |
91,593,984 | $ | 916 | $ | 18,835 | $ | (164,196 | ) | $ | 1,560,519 | $ | 1,416,074 | $ | 59,672 | $ | 1,475,746 | ||||||||||||||||
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| Year Ended December 31 | 2010 | 2009 | 2008 | |||||||||
| Cash and cash equivalents at beginning of year |
$ | 308,791 | $ | 253,303 | $ | 130,551 | ||||||
| Cash flows from operating activities: |
||||||||||||
| Net income |
337,359 | 189,623 | 213,008 | |||||||||
| Adjustments to reconcile income to cash flows from operating activities: |
||||||||||||
| Depreciation and amortization |
95,578 | 100,513 | 111,685 | |||||||||
| Restructuring and other charges |
6,958 | 11,643 | 25,789 | |||||||||
| Port de Bouc charges |
— | 12,393 | 38,544 | |||||||||
| Stock-based compensation |
15,694 | 307 | 18,467 | |||||||||
| Excess tax benefits realized from stock-based compensation arrangements |
(7,981 | ) | (2,111 | ) | (372 | ) | ||||||
| Equity in net income of unconsolidated investments (net of tax) |
(37,975 | ) | (22,322 | ) | (23,126 | ) | ||||||
| Dividends received from unconsolidated investments and nonmarketable securities |
16,414 | 18,045 | 13,294 | |||||||||
| Pension and postretirement expense |
20,993 | 9,708 | 2,631 | |||||||||
| Pension and postretirement contributions |
(80,105 | ) | (39,700 | ) | (40,279 | ) | ||||||
| Unrealized (gain) loss on investments in marketable securities |
(1,532 | ) | (3,554 | ) | 4,968 | |||||||
| Net change in noncurrent income tax payables and receivables |
2,241 | (34,020 | ) | (15,837 | ) | |||||||
| Net change in noncurrent environmental liabilities |
2,354 | (4,573 | ) | (4,753 | ) | |||||||
| Deferred income taxes |
47,099 | 1,720 | (12,048 | ) | ||||||||
| Change in current assets and liabilities, net of effects of acquisitions and special items: |
||||||||||||
| (Increase) decrease in accounts receivable |
(57,414 | ) | 1,269 | 90,481 | ||||||||
| (Increase) decrease in inventories |
(58,582 | ) | 180,132 | (87,929 | ) | |||||||
| Increase in other current assets excluding deferred income taxes |
(14,511 | ) | (5,012 | ) | (14,196 | ) | ||||||
| Increase (decrease) in accounts payable |
13,463 | (53,543 | ) | 33,452 | ||||||||
| Increase (decrease) in accrued expenses and income taxes |
35,774 | (18,715 | ) | (30,227 | ) | |||||||
| Other, net |
(4,518 | ) | 16,722 | 3,606 | ||||||||
| Net cash provided by operating activities |
331,309 | 358,525 | 327,158 | |||||||||
| Cash flows from investing activities: |
||||||||||||
| Capital expenditures |
(75,478 | ) | (100,786 | ) | (99,736 | ) | ||||||
| Cash payments related to acquisitions and other |
(11,978 | ) | (4,017 | ) | (63,960 | ) | ||||||
| Cash payments related to the Thann facility divestiture |
— | — | (2,556 | ) | ||||||||
| Cash payments related to the Port de Bouc facility divestiture |
— | (16,440 | ) | — | ||||||||
| Cash impact from deconsolidation of Stannica LLC, net |
(12,649 | ) | — | — | ||||||||
| Cash proceeds from divestitures |
8,600 | — | — | |||||||||
| Sales of (investments in) marketable securities, net |
652 | (347 | ) | (3,262 | ) | |||||||
| Investments in equity and other corporate investments |
(1,338 | ) | (40 | ) | (190 | ) | ||||||
| Collection of note receivable from sale of land |
— | — | 6,000 | |||||||||
| Net cash used in investing activities |
(92,191 | ) | (121,630 | ) | (163,704 | ) | ||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuance of senior notes |
346,853 | — | — | |||||||||
| Proceeds from other borrowings |
125,797 | 14,300 | 255,246 | |||||||||
| Repayments of long-term debt |
(424,123 | ) | (134,332 | ) | (48,176 | ) | ||||||
| Dividends paid to shareholders |
(49,643 | ) | (44,432 | ) | (42,321 | ) | ||||||
| Repurchases of common stock |
(14,945 | ) | (5,812 | ) | (168,952 | ) | ||||||
| Proceeds from exercise of stock options |
7,135 | 4,153 | 3,931 | |||||||||
| Excess tax benefits realized from stock-based compensation arrangements |
7,981 | 2,111 | 372 | |||||||||
| Withholding taxes paid on stock-based compensation award distributions |
(3,988 | ) | (5,062 | ) | (11,411 | ) | ||||||
| Dividends paid to noncontrolling interests |
— | (11,709 | ) | (13,614 | ) | |||||||
| Debt financing costs |
(3,005 | ) | — | (107 | ) | |||||||
| Net cash used in financing activities |
(7,938 | ) | (180,783 | ) | (25,032 | ) | ||||||
| Net effect of foreign exchange on cash and cash equivalents |
(10,321 | ) | (624 | ) | (15,670 | ) | ||||||
| Increase in cash and cash equivalents |
220,859 | 55,488 | 122,752 | |||||||||
| Cash and cash equivalents at end of year |
$ | 529,650 | $ | 308,791 | $ | 253,303 | ||||||
See accompanying notes to the consolidated financial statements.
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N O T E S TO T H E C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
NOTE 1—Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts and operations of Albemarle Corporation and our wholly owned, majority owned and controlled subsidiaries. Unless the context otherwise indicates, the terms “Albemarle,” “we,” “us,” “our” or “the Company” mean Albemarle Corporation and our consolidated subsidiaries. We apply the equity method of accounting for investments in which we have an ownership interest from 20% to 50% or where we exercise significant influence over the related investee’s operations. All significant intercompany accounts and transactions are eliminated in consolidation.
On January 1, 2009, we adopted new accounting guidance that changed the accounting for and reporting of minority interests (now referred to as noncontrolling interests). Noncontrolling interests are now classified as equity in our consolidated financial statements. Our consolidated statement of income presentation format was also changed and net income now includes the net income for both the parent and the noncontrolling interests, with disclosure of both amounts on the consolidated statements of income. The calculation of earnings per share continues to be based on net income amounts attributable to the parent. Prior period amounts related to noncontrolling interests have been reclassified to conform to the current period presentation.
Revenue Recognition
We recognize sales when the revenue is realized or realizable, and has been earned, in accordance with authoritative accounting guidance. We recognize net sales as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. Significant portions of our sales are sold free on board (FOB) shipping point or on an equivalent basis, and other transactions are based upon specific contractual arrangements. Our standard terms of delivery are generally included in our contracts of sale, order confirmation documents and invoices. We recognize revenue from services when performance of the services has been completed. We have a limited amount of consignment sales that are billed to the customer upon monthly notification of amounts used by the customers under these contracts. Where the Company incurs pre-production design and development costs under long-term supply contracts, these costs are expensed where they relate to the products sold unless contractual guarantees for reimbursement exist. Conversely, these costs are capitalized if they pertain to equipment that we will own and use in producing the products to be supplied and expect to utilize for future revenue generating activities.
Performance and Life Cycle Guarantees
We provide customers certain performance guarantees and life cycle guarantees. These guarantees entitle the customer to claim compensation if the product does not conform to performance standards originally agreed upon. Performance guarantees relate to minimum technical specifications that products produced with the delivered product must meet, such as yield and product quality. Life cycle guarantees relate to minimum periods for which performance of the delivered product is guaranteed. When either performance guarantees or life cycle guarantees are contractually agreed upon, an assessment of the appropriate revenue recognition treatment is evaluated. When testing or modeling of historical results predict that the performance or life cycle criteria will be satisfied, revenue is recognized in accordance with shipping terms at the time of delivery. When testing or modeling of historical results predict that the performance or life cycle criteria may not be satisfied, we bill the customer upon shipment and defer the related revenue and cost associated with these products. These deferrals are released to earnings when the contractual period expires.
Estimates, Assumptions and Reclassifications
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Certain amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to the current presentation.
Shipping and Handling Costs
Amounts billed to customers in a sales transaction related to shipping and handling have been classified as net sales and the cost incurred by us for shipping and handling has been classified as cost of goods sold in the accompanying consolidated statements of income. In addition, taxes billed to customers in a sales transaction are presented in the consolidated statements of income on a net basis.
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Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with insignificant interest rate risks and original maturities of three months or less.
Inventories
Inventories are primarily stated at lower of cost or market with cost determined on the first-in, first-out basis. Cost is determined on the weighted-average basis for a small portion of our inventories at foreign plants and our stores, supplies and other inventory. A portion of our domestic produced finished goods and raw materials are determined on the last-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment include costs of assets constructed, purchased or leased under a capital lease, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for normal repairs and maintenance are expensed as incurred. Costs associated with yearly planned major maintenance are deferred and amortized over 12 months. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income. Depreciation is computed by the straight-line method based on the estimated useful lives of the assets. We have a policy where our internal engineering group provides asset life guidelines for book purposes. These guidelines are reviewed against the economic life of the business for each project and asset life is determined as the lesser of the manufacturing life or the “business” life. The engineering guidelines are reviewed periodically.
We evaluate historical and expected undiscounted operating cash flows of our business segments to determine the future recoverability of any property, plant and equipment recorded. Property, plant and equipment is re-evaluated whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
The costs of brine wells, leases and royalty interests are primarily amortized over the estimated average life of the field on a straight-line basis. On a yearly basis for all fields, this approximates a units-of-production method based upon estimated reserves and production volumes.
Investments
Investments are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, we record our investments in equity-method investees in the consolidated balance sheets as “Investments” and our share of investees’ earnings or losses together with other-than temporary impairments in value as “Equity in net income of unconsolidated investments” in the consolidated statements of income.
Certain mutual fund investments are accounted for as trading equities and are marked-to-market on a monthly basis through the consolidated statements of income. Investments in joint ventures and nonmarketable securities of immaterial entities are estimated based upon the overall performance of the entity where financial results are not available on a timely basis.
In June 2009, the Financial Accounting Standards Board, or FASB, amended its accounting guidance on the consolidation of variable interest entities with an effective date of January 1, 2010. This new guidance eliminated the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. The adoption of the new guidance did not have a material impact on our consolidated financial statements.
Environmental Compliance and Remediation
Environmental compliance costs include the cost of purchasing and/or constructing assets to prevent, limit and/or control pollution or to monitor the environmental status at various locations. These costs are capitalized and depreciated based on estimated useful lives. Environmental compliance costs also include maintenance and operating costs with respect to pollution prevention and control facilities and other administrative costs. Such operating costs are expensed as incurred. Environmental remediation costs of facilities used in current operations are generally immaterial and are expensed as incurred.
On an undiscounted basis, we accrue for environmental remediation costs and post-remediation costs that relate to existing conditions caused by past operations at facilities or off-plant disposal sites in the accounting period in which responsibility is
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established and when the related costs are estimable. In developing these cost estimates, we evaluate currently available facts regarding each site, with consideration given to existing technology, presently enacted laws and regulations, prior experience in remediation of contaminated sites, the financial capability of other potentially responsible parties and other factors, subject to uncertainties inherent in the estimation process. Additionally, these estimates are reviewed periodically, with adjustments to the accruals recorded as necessary.
Research and Development Expenses
Our research and development expenses related to present and future products are expensed as incurred. These expenses consist primarily of personnel related costs and other overheads, as well as outside service and consulting costs incurred for specific programs. Our U.S. facilities in Michigan, Pennsylvania, South Carolina, Texas, and Louisiana and our global facilities in the Netherlands, Germany, Belgium, China and Korea form the capability base for our contract research and custom manufacturing businesses. These business areas provide research and scale-up services primarily to innovative life science companies.
Goodwill and Other Intangible Assets
We account for goodwill and other intangibles acquired in a business combination in conformity with current accounting guidance that requires that goodwill and indefinite-lived intangible assets not be amortized.
We test goodwill for impairment by comparing the estimated fair value of our reporting units to the related carrying value. We measure the fair value based on present value techniques involving future cash flows. Future cash flows include assumptions for sales volumes, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic or market related factors. Significant management judgment is involved in estimating these variables and they include inherent uncertainties since they are forecasting future events. We use a Weighted Average Cost of Capital (“WACC”) approach to determine our discount rate for goodwill recoverability testing. Our WACC calculation includes factors such as the risk-free rate of return, borrowing costs and expected equity premiums. The factors in this calculation are largely external to our company, and therefore, are beyond our control. We test our recorded goodwill balances for impairment in the fourth quarter of each year or upon the occurrence of events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts.
Definite-lived intangible assets, such as purchased technology, patents, customer lists and trade names are amortized over their estimated useful lives, generally for periods ranging from three to fifty years. We continually evaluate the reasonableness of the useful lives of these assets and test for impairment in accordance with current accounting guidance. See Note 10, “Goodwill and Other Intangibles.”
Pension Plans and Other Postretirement Benefits
Under authoritative accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. As required, we recognize a balance sheet asset or liability for each of the pension or postretirement benefit plans equal to the plan’s funded status as of the measurement date. The primary assumptions are as follows:
| • | Discount Rate—The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. |
| • | Expected Return on Plan Assets—We project the future return on plan assets based on prior performance and future expectations for the types of investments held by the plans, as well as the expected long-term allocation of plan assets for these investments. These projected returns reduce the net benefit costs recorded currently. |
| • | Rate of Compensation Increase—For salary-related plans, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement. |
| • | Rate of Increase in the Per Capita Cost of Covered Health Care Benefits—We project the expected increases in the cost of covered health care benefits. |
During 2010, we made changes to the assumptions related to the discount rate, the expected return on plan assets, the rate of compensation increase for salary-related plans, and the rate of increase in the per capita cost of covered health care benefits. We consider available information that we deem relevant when selecting each of these assumptions.
In selecting the discount rates for the U.S. plans, we establish a range of reasonable rates based on methods developed by subject matter experts that reflect current market conditions. For 2010, we relied on methods developed by Citigroup, AonHewitt, and Milliman to establish a range of acceptable discount rates based on authoritative accounting guidance. These methods calculate
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discount rates based on high-quality bond data and the projected plan cash flows. We believe our selected discount rates accurately reflect market conditions as of the December 31, 2010 measurement date.
In selecting the discount rates for the foreign plans, we relied on AonHewitt methods, including the AonHewitt Top-Quartile and a yield curve derived from fixed-income security yields. The yield curve is generally based on a universe containing Aa-graded corporate bonds in the Euro zone without special features or options, which could affect the duration. In some countries, the yield curve is based on local government bond rates with a premium added to reflect corporate bond risk. Payments we expect to be made from our retirement plans are applied to the resulting yield curve. For each plan, the discount rate was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
At December 31, 2010, the weighted-average discount rate was reduced for the pension plans from 5.77% to 5.40% and for the other postretirement plans from 5.70% to 5.30% to reflect market conditions as of the December 31, 2010 measurement date.
In estimating the expected return on plan assets, we consider past performance and future expectations for the types of investments held by the plan as well as the expected long-term allocation of plan assets to these investments. For the year 2010, the weighted-average expected rate of return on domestic pension plan assets was 8.25%, compared to 8.75% for 2009. There has been no change to the assumed rate of return on U.S. pension plan assets effective January 1, 2011. Also, there was no change in the weighted-average expected 7.0% return on other postretirement benefit plan assets. Our U.S. defined benefit plan for non-represented employees was closed to new participants effective March 31, 2004. We adopted a defined contribution pension plan for U.S. employees hired after March 31, 2004.
In projecting the rate of compensation increase, we consider past experience in light of movements in inflation rates. At December 31, 2010, the assumed weighted-average rate of compensation increase changed to 3.93% from 3.90% for the pension plans. The assumed weighted-average rate of compensation increase remained unchanged at 4.0% for the other postretirement plans at December 31, 2010.
In selecting the rate of increase in the per capita cost of covered health care benefits, we consider past performance and forecasts of future health care cost trends. At December 31, 2010, the previously assumed ultimate rate of increase in the per capita cost of covered health care benefits for U.S. retirees remained unchanged. For 2011, the assumed trend rate for pre-65 coverage is 7.5% per year, decreasing to an ultimate rate of 5.0% in the year 2019. The 2011 assumed trend rate for post-65 coverage is 12.0% per year, decreasing to an ultimate rate of 5.0% in the year 2020.
Employee Savings Plan
Certain of our employees participate in our defined contribution 401(k) employee savings plan, which is generally available to all U.S. full-time salaried and non-union hourly employees and to employees who are covered by a collective bargaining agreement that provides for such participation.
This U.S. defined contribution plan is funded with contributions made by the participants and us. Our contribution to the 401(k) plan amounted to $8.4 million, $8.2 million and $8.8 million in 2010, 2009 and 2008, respectively. We amended our 401(k) plan in 2004 to allow pension contributions to be made by us to participants hired or rehired on or after April 1, 2004 as these participants are not eligible to participate in the Company’s defined benefit pension plan. The pension contributions in the defined contribution plan are made in cash and are equal to 5%, 6% or 7% of the participant’s base pay depending on years of service. In 2010, 2009 and 2008, these contributions amounted to $3.9 million, $3.5 million and $3.4 million, respectively.
With respect to our foreign subsidiaries, we also have a defined contribution pension plan for employees in the United Kingdom. The annual contribution to the United Kingdom defined contribution plan is based on a percentage of eligible employee compensation and amounted to $0.4 million, $0.4 million and $0.6 million for 2010, 2009 and 2008, respectively. In 2006, we formalized a new plan in the Netherlands similar to a collective defined contribution plan. We paid approximately $8.8 million, $9.0 million and $10.3 million in 2010, 2009 and 2008, respectively, in annual premiums and related costs pertaining to this plan.
Deferred Compensation Plan
We maintain an Executive Deferred Compensation Plan, or the Plan, that was adopted in 2001 and subsequently amended. The purpose of the Plan is to provide current tax planning opportunities, as well as supplemental funds upon the retirement or death of certain employees of Albemarle. The Plan is intended to aid in attracting and retaining employees of exceptional ability by providing them with these benefits. We also maintain a Benefit Protection Trust, or the Trust, that was set up to provide a source of funds to assist in meeting the obligations of the Plan, subject to the claims of our creditors in the event of our insolvency. Assets of the Trust are consolidated in accordance with authoritative guidance. The assets of the Trust consist primarily of mutual fund investments
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(which are accounted for as trading securities and are marked-to-market on a monthly basis through the consolidated statement of income) and cash and cash equivalents.
Stock-based Compensation Expense
The fair value of restricted stock awards and performance unit awards is determined based on the number of shares or units granted and the quoted price of our common stock at grant date, and the fair value of stock options is determined using the Black-Scholes valuation model. The fair value of these awards is determined after giving effect to estimated forfeitures. Such value is recognized as expense over the service period, which is generally the vesting period of the equity grant. To the extent restricted stock awards, performance unit awards and stock options are forfeited prior to vesting in excess of the estimated forfeiture rate, the corresponding previously recognized expense is reversed as an offset to operating expenses.
Income Taxes
We use the liability method for determining our income taxes, under which current and deferred tax liabilities and assets are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not.
Deferred income taxes are provided for the estimated income tax effect of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred tax assets are also provided for operating losses, capital losses and certain tax credit carryovers. A valuation allowance, reducing deferred tax assets, is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of such deferred tax assets is dependent upon the generation of sufficient future taxable income of the appropriate character. Although realization is not assured, we do not establish a valuation allowance when we believe it is more likely than not that a net deferred tax asset will be realized.
We only recognize a tax benefit after concluding that it is more likely than not that the benefit will be sustained upon audit by the respective taxing authority based solely on the technical merits of the associated tax position. Once the recognition threshold is met, we recognize a tax benefit measured as the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized. Interest and penalties related to income tax liabilities under current accounting guidance for uncertain tax positions are included in income tax expense.
We have designated the undistributed earnings of substantially all of our foreign operations as permanently reinvested and as a result we do not provide for deferred income taxes on the unremitted earnings of these subsidiaries. Our foreign earnings are computed under U.S. federal tax earnings and profits, or E&P, principles. In general, to the extent our financial reporting book basis over tax basis of a foreign subsidiary exceeds these E&P amounts, deferred taxes have not been provided as they are essentially permanent in duration. The determination of the amount of such unrecognized deferred tax liability is not practicable. We provide for deferred income taxes on our undistributed earnings of foreign operations that are not deemed to be permanently reinvested.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is comprised principally of foreign currency translation adjustments and net transition asset, net prior service benefit, net benefit plan loss for our defined benefit plans and related deferred income taxes in accordance with current accounting guidance.
Foreign Currency Translation
The assets and liabilities of all foreign subsidiaries were prepared in their respective functional currencies and translated into U.S. Dollars based on the current exchange rate in effect at the balance sheet dates, while income and expenses were translated at average exchange rates for the periods presented. Translation adjustments are reflected as a separate component of equity.
Our consolidated statements of income include foreign exchange transaction gains (losses) for the years ended December 31, 2010, 2009, and 2008 in the amount of $1.0 million, $(3.7) million, and $1.0 million, respectively.
Derivative Financial Instruments
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies and through the use of foreign currency forward contracts from time to time, which generally expire within one year. The principal objective of such contracts is to minimize the financial risks and costs associated with global operating activities. While these contracts are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying foreign currency
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exposures being hedged. Gains and losses on foreign currency forward contracts are recognized currently in income, but generally do not have a significant impact on results of operations.
The counterparties to these contractual agreements are major financial institutions with which we generally have other financial relationships. We are exposed to credit loss in the event of nonperformance by these counterparties. However, we do not anticipate nonperformance by the counterparties. We do not utilize financial instruments for trading or other speculative purposes.
At December 31, 2010 and 2009, we had outstanding foreign currency forward contracts with notional values totaling $375.4 million and $18.3 million, respectively.
In 2004, we entered into treasury lock agreements, or T-locks, with a notional value of $275.0 million, to fix the yield on the U.S. Treasury security used to set the yield for approximately 85% of our January 2005 public offering of senior notes. The T-locks fixed the yield on the U.S. Treasury security at approximately 4.25%. The value of the T-locks resulted from the difference between (i) the yield-to-maturity of the 10-year U.S. Treasury security that had the maturity date most comparable to the maturity date of the senior notes issued and (ii) the fixed rate of approximately 4.25%. The cumulative loss effect of the T-lock agreements was $2.2 million and is being amortized over the life of the senior notes as an adjustment to the interest expense of the senior notes. At December 31, 2010 and 2009, there were unrealized losses of approximately $0.9 million ($0.6 million after income taxes) and $1.1 million ($0.7 million after income taxes), respectively, in accumulated other comprehensive loss.
In addition, certain of our operations use natural gas as a source of energy which can expose our business to market risk when the price of natural gas changes suddenly. In an attempt to mitigate the impact and volatility of price swings in the natural gas market, from time to time we enter into natural gas hedge contracts with one or more major financial institutions for a portion of our 12-month rolling forecast for North American natural gas requirements. Such derivatives are held to secure natural gas at fixed prices and are not entered into for trading purposes. At December 31, 2010 and 2009, we had no natural gas hedge contracts outstanding.
Recently Issued Accounting Pronouncements
In October 2009, the FASB issued new accounting guidance relating to separating consideration in multiple-deliverable revenue arrangements. Under this guidance, multiple-deliverable arrangements will be accounted for separately (rather than on a combined basis) by selecting the best evidence of selling price among vendor-specific objective evidence, third-party evidence or estimated selling price. The guidance is effective for fiscal years beginning on or after June 15, 2010. We do not expect this new guidance to have a material effect on our consolidated financial statements.
In January 2010, new accounting guidance was issued by the FASB that requires additional disclosures about amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons therefore. Additionally, entities are now required to present separately information about purchases, sales, issuances and settlements in the reconciliation of fair value measurements using significant unobservable (Level 3) inputs. The amendments also clarified that entities should provide fair value measurement disclosures for each class, or subset, of assets or liabilities within a line item in the statement of financial position, and entities should disclose information about inputs and valuation techniques for Level 2 and Level 3 fair value measurements, whether recurring or nonrecurring. These amendments are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation of fair value measurements using Level 3 inputs, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The provisions of this guidance that became effective for us January 1, 2010 did not have a material effect on our consolidated financial statements. We are currently evaluating the potential impact of the provisions that will be effective for us January 1, 2011 but do not expect that they will have a material effect on our consolidated financial statements.
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NOTE 2—Supplemental Cash Flow Information:
Supplemental information related to the consolidated statements of cash flows is as follows (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Cash paid during the year for: |
||||||||||||
| Income taxes (net of refunds of $2,611, $13,733 and $9,617 in 2010, 2009 and 2008, respectively) |
$ | 34,808 | $ | 14,807 | $ | 44,621 | ||||||
| Interest (net of capitalization) |
$ | 21,905 | $ | 22,144 | $ | 36,084 | ||||||
| Supplemental non-cash disclosures due to the divestiture of the Port de Bouc, France facility effective December 31, 2008: |
||||||||||||
| Decrease in inventory |
$ | — | $ | (3,689 | ) | $ | (7,989 | ) | ||||
| Decrease in other current assets |
$ | — | $ | (7,878 | ) | $ | (2,481 | ) | ||||
| Decrease in property, plant and equipment |
$ | — | $ | — | $ | (45,714 | ) | |||||
| Decrease in accumulated depreciation |
$ | — | $ | — | $ | (23,583 | ) | |||||
| Decrease in other noncurrent assets |
$ | — | $ | — | $ | (550 | ) | |||||
| (Decrease) increase in current liabilities (principally accrued expenses) |
$ | — | $ | (4,745 | ) | $ | 10,252 | |||||
| Decrease in other noncurrent liabilities |
$ | — | $ | — | $ | (1,500 | ) | |||||
| Decrease in accumulated other comprehensive loss |
$ | — | $ | — | $ | (3,359 | ) | |||||
NOTE 3—Earnings Per Share:
On January 1, 2009, we adopted new accounting guidance associated with share-based payment transactions considered to be participating securities. This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends, such as certain of our restricted stock awards, are participating securities and therefore shall be included in the earnings per share calculation pursuant to the two class method. In addition, the guidance requires all prior-period earnings per share data to be adjusted retrospectively, and as a result, all prior period earnings per share data presented herein have been adjusted to conform to these provisions. For the year ended December 31, 2009, this new guidance resulted in a decrease of $0.01 in our basic earnings per share as a result of an increase in our basic weighted-average common shares outstanding of approximately 317,000 shares while there was no impact on our reported diluted earnings per share despite an increase in our diluted weighted-average common shares of approximately 153,000 shares. For the year ended December 31, 2008, our basic and diluted earnings per share decreased $0.01 as a result of an increase in our basic and diluted weighted-average common shares of approximately 319,000 and 211,000 shares, respectively, in accordance with the new accounting guidance.
Basic and diluted earnings per share are calculated as follows (in thousands, except per share amounts):
| 2010 | 2009 | 2008 | ||||||||||
| Basic earnings per share |
||||||||||||
| Numerator: |
||||||||||||
| Income available to shareholders, as reported |
$ | 323,720 | $ | 178,368 | $ | 194,202 | ||||||
| Denominator: |
||||||||||||
| Average number of shares of common stock outstanding |
91,393 | 91,512 | 91,657 | |||||||||
| Basic earnings per share |
$ | 3.54 | $ | 1.95 | $ | 2.12 | ||||||
| Diluted earnings per share |
||||||||||||
| Numerator: |
||||||||||||
| Income available to shareholders, as reported |
$ | 323,720 | $ | 178,368 | $ | 194,202 | ||||||
| Denominator: |
||||||||||||
| Average number of shares of common stock outstanding |
91,393 | 91,512 | 91,657 | |||||||||
| Incremental shares under stock compensation plans |
791 | 534 | 1,084 | |||||||||
| Total shares |
92,184 | 92,046 | 92,741 | |||||||||
| Diluted earnings per share |
$ | 3.51 | $ | 1.94 | $ | 2.09 | ||||||
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The Company’s policy on how to determine windfalls and shortfalls for purposes of calculating assumed stock award proceeds under the treasury stock method when determining the denominator for diluted earnings per share is to exclude the impact of pro forma deferred tax assets (i.e. the windfall or shortfall that would be recognized in the financial statements upon exercise of the award). At December 31, 2010, there were 10,000 common stock equivalents not included in the computation of diluted earnings per share.
NOTE 4—Other Accounts Receivable:
Other accounts receivable consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Value added tax/consumption tax |
$ | 15,040 | $ | 17,626 | ||||
| Other |
18,732 | 17,397 | ||||||
| Total |
$ | 33,772 | $ | 35,023 | ||||
NOTE 5—Inventories:
Approximately 23% and 20% of our inventories are valued using the last-in, first-out, or LIFO, method at December 31, 2010 and 2009, respectively. The portion of our domestic inventories stated on the LIFO basis amounted to $91.4 million and $71.1 million at December 31, 2010 and 2009, respectively, which are below replacement cost by approximately $45.7 million and $47.6 million, respectively.
NOTE 6—Other Current Assets:
Other current assets consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Deferred income taxes—current(a) |
$ | 4,689 | $ | 9,322 | ||||
| Income tax receivables |
10,274 | 7,683 | ||||||
| Prepaid expenses |
39,715 | 29,570 | ||||||
| Total |
$ | 54,678 | $ | 46,575 | ||||
| (a) | See Note 18, “Income Taxes.” |
NOTE 7—Property, Plant and Equipment:
Property, plant and equipment, at cost, consists of the following (in thousands):
| Useful Lives (Years) |
2010 | 2009 | ||||||||||
| Land |
— | $ | 55,638 | $ | 50,468 | |||||||
| Land improvements |
5 – 30 | 48,798 | 50,084 | |||||||||
| Buildings and improvements |
10 – 45 | 204,858 | 196,527 | |||||||||
| Machinery and equipment |
3 – 19 | 1,484,515 | 1,478,693 | |||||||||
| Machinery and equipment (major plant components) |
20 – 45 | 502,906 | 504,138 | |||||||||
| Property, plant and equipment under capital lease(a) |
19 – 50 | 24,652 | 24,652 | |||||||||
| Long-term mineral rights and production equipment costs |
7 – 60 | 60,630 | 59,118 | |||||||||
| Construction in progress |
— | 58,181 | 42,449 | |||||||||
| Total |
$ | 2,440,178 | $ | 2,406,129 | ||||||||
| (a) | Assets under capital lease are primarily machinery and equipment with useful lives ranging from 19 to 25 years. Includes building with a cost of $1.3 million which has a useful life of 50 years. |
The cost of property, plant and equipment, including machinery and equipment under capital lease, is depreciated generally by the straight-line method. Depreciation expense amounted to $82.5 million, $87.3 million and $97.4 million during the years ended December 31, 2010, 2009 and 2008, respectively. Interest capitalized on significant capital projects in 2010, 2009 and 2008 was $1.1
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million, $1.2 million and $1.0 million, respectively, while amortization of capitalized interest (which is included in depreciation expense) in 2010, 2009 and 2008 was $1.2 million, $1.3 million and $1.3 million, respectively.
As of December 31, 2010 and 2009, accumulated amortization for assets under capital lease was $8.9 million and $7.8 million, respectively.
In the third quarter of 2010, we purchased certain property and equipment in Yeosu, South Korea in connection with our plans for building a metallocene polyolefin catalyst and trimethyl gallium (TMG) manufacturing site. The total purchase price of the initial property and equipment acquired was approximately $10.2 million, of which $8.0 million was paid in 2010 (reported in acquisitions and other in our December 31, 2010 consolidated statement of cash flows) , with the remainder expected to be paid by first quarter of 2011.
On July 30, 2010, we sold our Teesport, UK manufacturing site for net proceeds of approximately $8.6 million. The proceeds of this sale approximated the net book values of the assets sold.
NOTE 8—Investments:
Investments include our share of unconsolidated joint ventures, nonmarketable securities and marketable equity securities. The following table details our investment balances at December 31, 2010 and 2009 (in thousands).
| 2010 | 2009 | |||||||
| Joint ventures |
$ | 160,839 | $ | 126,459 | ||||
| Nonmarketable securities |
2,059 | 2,715 | ||||||
| Marketable equity securities |
17,792 | 16,910 | ||||||
| Total |
$ | 180,690 | $ | 146,084 | ||||
In June 2009, the FASB amended its accounting guidance on the consolidation of variable interest entities with an effective date of January 1, 2010. This new guidance eliminated the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary. The adoption of the new guidance did not have a material impact on our consolidated financial statements.
Effective January 1, 2010, we entered into a new operating agreement relating to our heretofore consolidated joint venture Stannica LLC and divested ten percent of our interest in the venture to our partner for proceeds of approximately $2.1 million, reducing our ownership to fifty percent. We have determined that the joint venture is a variable interest entity but that we are not the primary beneficiary of the venture arrangement; accordingly, we have deconsolidated our investment in this venture. We recorded a gain of approximately $1.1 million on the transaction (included in consolidated gross profit), an $8.1 million reduction in noncontrolling interests, and a $20.4 million reduction in other consolidated net assets comprised of $14.7 million in cash plus other net working capital. Our retained equity investment in the joint venture was recorded at its fair value of $11.3 million (giving rise to the gain amount noted above) and is reported in “Investments” in our consolidated balance sheet. To estimate the fair value of our investment, we used an income approach based on a discounted cash flow model which incorporated estimates and assumptions supported mainly by unobservable inputs, including pricing and volume data, anticipated growth rates, profitability levels, inflation factors, tax and discount rates. Our maximum exposure to loss in connection with our continuing involvement with Stannica LLC is limited to our investment carrying value. Starting in the first quarter of 2010, the earnings associated with our investment in Stannica LLC are reported in “Equity in net income of unconsolidated investments (net of tax)” in our consolidated statement of income in our Catalysts segment. Prior to this transaction, Stannica LLC’s consolidated operating results were included in our Polymer Solutions segment.
At December 31, 2010 and 2009, the carrying amount of our investments in unconsolidated joint ventures exceeded the amount of underlying equity in net assets by approximately $16.0 million. These amounts represent the differences between the value of certain assets of the joint ventures and our related valuation on a U.S. GAAP basis. As of December 31, 2010 and 2009, $1.8 million and $2.1 million, respectively, remained to be amortized over the remaining useful lives of the assets with the balance of the difference representing primarily our share of the joint ventures’ goodwill.
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Our ownership positions in significant unconsolidated investments are shown below:
| 2010 | 2009 | 2008 | ||||||||||||
| * |
Nippon Aluminum Alkyls – a joint venture with Mitsui Chemicals, Inc. that produces aluminum alkyls |
50% | 50% | 50% | ||||||||||
| * |
Magnifin Magnesiaprodukte GmbH & Co. KG – a joint venture with Radex Heraklith Industriebeteiligung AG that produces specialty magnesium hydroxide products |
50% | 50% | 50% | ||||||||||
| * |
Nippon Ketjen Company Limited – a joint venture with Sumitomo Metal Mining Company Limited that produces refinery catalysts |
50% | 50% | 50% | ||||||||||
| * |
Eurecat S.A. – a joint venture with IFP Investissements for refinery catalysts regeneration services |
50% | 50% | 50% | ||||||||||
| * |
Fábrica Carioca de Catalisadores S.A. – a joint venture with Petrobras Quimica S.A.–PETROQUISA that produces catalysts and includes catalysts research and product development activities |
50% | 50% | 50% | ||||||||||
| * |
Stannica, LLC – a joint venture with Arkema Group LLC that produces tin stabilizers |
50% | N/A | N/A | ||||||||||
Our investment in the significant unconsolidated joint ventures above amounted to $155.7 million and $123.3 million as of December 31, 2010 and 2009, respectively, and the amount included in “Equity in net income of unconsolidated investments (net of tax)” in the consolidated statements of income totaled $37.1 million, $21.1 million and $22.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. All of the unconsolidated joint ventures in which we have investments are private companies and accordingly do not have a quoted market price available. The following summary lists our assets, liabilities and results of operations for our significant unconsolidated joint ventures presented herein (in thousands):
| 2010 | 2009 | |||||||
| Summary of Balance Sheet Information at December 31: |
||||||||
| Current assets |
$ | 301,769 | $ | 243,724 | ||||
| Other assets |
170,622 | 165,882 | ||||||
| Total assets |
$ | 472,391 | $ | 409,606 | ||||
| Current liabilities |
$ | 135,622 | $ | 126,338 | ||||
| Noncurrent liabilities |
43,591 | 57,583 | ||||||
| Total liabilities |
$ | 179,213 | $ | 183,921 | ||||
| 2010 | 2009 | 2008 | ||||||||||
| Summary of Statements of Income Information for the year ended December 31:(a) |
||||||||||||
| Net sales(b) |
$ | 557,372 | $ | 441,141 | $ | 464,755 | ||||||
| Gross profit(b) |
$ | 161,273 | $ | 124,641 | $ | 122,712 | ||||||
| Income before income taxes |
$ | 100,853 | $ | 74,462 | $ | 63,507 | ||||||
| Net income |
$ | 69,974 | $ | 49,575 | $ | 42,201 | ||||||
| (a) | On June 30, 2008, we acquired the remaining 25% interests of our majority owned Polymer Solutions segment joint ventures in China: Ningbo Jinhai Albemarle Chemical and Industry Company Limited and Shanghai Jinhai Albemarle Fine Chemicals Company Limited. |
| (b) | During 2010, we made adjustments to the sales and gross profit items above to correct previously reported amounts for 2009 and 2008. These presentation adjustments, individually or in the aggregate, did not affect the investment balances or the equity in net income of unconsolidated investment amounts as reported and are not considered material to the consolidated financial statements. |
We have evaluated each of the unconsolidated investments pursuant to current accounting guidance and none qualify for consolidation. Dividends received from our significant unconsolidated investments were $15.8 million, $18.0 million and $13.1 million in 2010, 2009 and 2008, respectively.
Assets of the Benefit Protection Trust, in conjunction with our Executive Deferred Compensation Plan, are accounted for as trading securities in accordance with authoritative accounting guidance. The assets of the Trust consist primarily of mutual fund investments and are marked-to-market on a monthly basis through the consolidated statements of income. As of December 31, 2010 and 2009, these marketable securities amounted to $17.8 million and $16.9 million, respectively.
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During the second quarter of 2010, we finalized an agreement with our joint venture partner to adjust the allocation of profits and dividends in connection with our consolidated investment in Jordan Bromine Company Limited, or JBC. As a result of this agreement, we recorded $8.0 million in cumulative dividend adjustments to noncontrolling interests as reported in the consolidated statement of changes in equity for the year ended December 31, 2010.
In the fourth quarter of 2010, we finalized certain agreements in connection with our new 50% owned joint venture Saudi Organometallic Chemicals Company (SOCC). We also made approximately $1.3 million in initial capital contributions in this investment during the fourth quarter of 2010.
NOTE 9—Other Assets:
Other assets consist of the following (in thousands):
| 2010 | 2009 | |||||||||
| Assets related to unrecognized tax benefits(a) |
$ | 12,262 | $ | 14,932 | ||||||
| Deferred income taxes—noncurrent(a) |
64,629 | 73,667 | ||||||||
| Other |
48,987 | 34,660 | ||||||||
| Total |
$ | 125,878 | $ | 123,259 | ||||||
| (a) | See Note 18, “Income Taxes.” |
NOTE 10—Goodwill and Other Intangibles:
Goodwill and other intangibles consist principally of goodwill, customer lists, trade names, patents, and other intangibles.
The following table summarizes the changes in goodwill by operating segment for the year ended December 31, 2010 (in thousands):
| Balances at Beginning of Year |
Changes | Foreign Exchange Impact |
Balances at December 31, 2010 | |||||||||||||||||
| Polymer Solutions |
$ | 36,153 | $ | — | $ | 57 | $ | 36,210 | ||||||||||||
| Catalysts |
228,166 | — | (16,743) | 211,423 | ||||||||||||||||
| Fine Chemistry |
28,402 | (3,711)(a) | (86) | 24,605 | ||||||||||||||||
| Total |
$ | 292,721 | $ | (3,711) | $ | (16,772) | $ | 272,238 | ||||||||||||
| (a) | The decrease in goodwill in our Fine Chemistry segment relates to the July 2010 sale of our Teesport, UK manufacturing facility. See Note 7 “Property, Plant and Equipment.” |
The following table summarizes the changes in goodwill by operating segment for the year ended December 31, 2009 (in thousands):
| Balances at Beginning of Year |
Changes | Foreign Exchange Impact |
Balances at December 31, 2009 |
|||||||||||||
| Polymer Solutions |
$ | 34,539 | $ | 1,231 (a) | $ | 383 | $ | 36,153 | ||||||||
| Catalysts |
221,868 | (1,180) (b) | 7,478 | 228,166 | ||||||||||||
| Fine Chemistry |
22,360 | 5,909 (c) | 133 | 28,402 | ||||||||||||
| Total |
$ | 278,767 | $ | 5,960 | $ | 7,994 | $ | 292,721 | ||||||||
| (a) | The increase in goodwill in our Polymer Solutions segment relates primarily to adjustments to the final purchase price allocation of the remaining 25% interests in our majority owned joint ventures in China: Ningbo Jinhai Albemarle Chemical and Industry Company Limited and Shanghai Jinhai Albemarle Fine Chemicals Company Limited. |
| (b) | The decrease in goodwill in our Catalysts segment relates to the reduction of certain restructuring accruals that were recorded as part of our purchase price accounting for the Refinery Catalysts acquisition in July 2004. |
| (c) | The increase in goodwill in our Fine Chemistry segment includes $3.2 million related to adjustments to finalize the purchase price allocation of Sorbent Technologies Corporation, a full-service power plant mercury-control provider, and |
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| $2.7 million associated with final purchase accounting adjustments relating to our 75% acquired interest in the Sinobrom joint venture executed in December 2008. |
Other intangibles consist of the following at December 31, 2010 and 2009 (in thousands):
| 2010 | ||||||||||||||||||||
| Useful Lives (Years) |
Gross Carrying Amount |
Accumulated Amortization |
Accumulated Foreign Exchange Impact |
Net | ||||||||||||||||
| Customer lists |
15 – 35 | $ | 95,652 | $ | (25,660) | $ | 3,467 | $ | 73,459 | |||||||||||
| Trade names (a) |
5 – 35 | 45,912 | (12,015) | 406 | 34,303 | |||||||||||||||
| Patents |
8 – 19 | 42,016 | (30,539) | 2,169 | 13,646 | |||||||||||||||
| Manufacturing contracts and supply/service agreements |
8 – 12 | 12,503 | (11,285) | 402 | 1,620 | |||||||||||||||
| Land use rights |
37 –50 | 6,647 | (602) | 788 | 6,833 | |||||||||||||||
| Military specification approvals |
35 | 4,345 | (983) | — | 3,362 | |||||||||||||||
| Noncompete agreements |
3 – 12 | 3,567 | (3,560) | 512 | 519 | |||||||||||||||
| Licenses |
5 – 20 | 146 | (123) | (3) | 20 | |||||||||||||||
| Other |
3 – 20 | 3,432 | (2,705) | 275 | 1,002 | |||||||||||||||
| Total |
$ | 214,220 | $ | (87,472) | $ | 8,016 | $ | 134,764 | ||||||||||||
| 2009 | ||||||||||||||||||||
| Useful Lives (Years) |
Gross Carrying Amount |
Accumulated Amortization |
Accumulated Foreign Exchange Impact |
Net | ||||||||||||||||
| Customer lists |
15 – 35 | $ | 95,652 | $ | (21,025) | $ | 4,842 | $ | 79,469 | |||||||||||
| Trade names (a) |
5 – 35 | 44,754 | (10,401) | 2,608 | 36,961 | |||||||||||||||
| Patents |
8 – 19 | 42,016 | (25,766) | 2,554 | 18,804 | |||||||||||||||
| Manufacturing contracts and supply/service agreements |
8 – 12 | 12,503 | (10,038) | 424 | 2,889 | |||||||||||||||
| Land use rights |
37 – 50 | 6,647 | (413) | 583 | 6,817 | |||||||||||||||
| Military specification approvals |
35 | 4,345 | (858) | — | 3,487 | |||||||||||||||
| Noncompete agreements |
3 – 12 | 3,567 | (3,150) | 522 | 939 | |||||||||||||||
| Licenses |
5 – 20 | 146 | (117) | 1 | 30 | |||||||||||||||
| Other |
3 – 20 | 3,432 | (2,578) | 273 | 1,127 | |||||||||||||||
| Total |
$ | 213,062 | $ | (74,346) | $ | 11,807 | $ | 150,523 | ||||||||||||
| (a) | Trade names include a gross carrying amount of $10.3 million for an indefinite lived intangible asset. |
Amortization of other intangibles amounted to $13.1 million, $13.2 million and $14.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total estimated amortization expense of other intangibles for the next five fiscal years is as follows (in thousands):
| Estimated Amortization Expense |
||||
| 2011 |
$ | 11,590 | ||
| 2012 |
$ | 9,531 | ||
| 2013 |
$ | 7,057 | ||
| 2014 |
$ | 7,051 | ||
| 2015 |
$ | 6,386 | ||
In April 2008, the FASB issued new accounting guidance which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. This new guidance was required to be applied prospectively to intangible assets acquired after the effective date. We have applied this new guidance to intangible assets acquired after January 1, 2009. The adoption of this new guidance did not have a material impact on our consolidated financial statements.
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NOTE 11—Accrued Expenses:
Accrued expenses consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Employee benefits, payroll and related taxes |
$ | 46,344 | $ | 39,532 | ||||
| Taxes other than income taxes and payroll taxes |
22,294 | 25,151 | ||||||
| Deferred revenue |
14,914 | 10,834 | ||||||
| Accrued interest payable |
8,211 | 7,096 | ||||||
| Reduction in force accruals (a) |
3,845 | 4,880 | ||||||
| Other |
48,076 | 45,775 | ||||||
| Total |
$ | 143,684 | $ | 133,268 | ||||
| (a) See Note 19, “Special Items.” |
||||||||
NOTE 12—Long-Term Debt:
Long-term debt consists of the following (in thousands):
| 2010 | 2009 | |||||||
| Variable-rate domestic bank loans |
$ | — | $ | 410,000 | ||||
| 5.10% Senior notes, net of unamortized discount of $137 at December 31, 2010 and $170 at December 31, 2009 |
324,863 | 324,830 | ||||||
| 4.50% Senior notes, net of unamortized discount of $3,128 |
346,872 | — | ||||||
| Fixed rate foreign borrowings |
33,223 | 38,317 | ||||||
| Capital lease obligation |
5,873 | 9,709 | ||||||
| Variable-rate foreign bank loans |
149,520 | 29,226 | ||||||
| Miscellaneous |
559 | 631 | ||||||
| Total |
860,910 | 812,713 | ||||||
| Less amounts due within one year (a) |
8,983 | 36,310 | ||||||
| Total long-term debt |
$ | 851,927 | $ | 776,403 | ||||
| (a) | During the first quarter of 2010, approximately $27.8 million in outstanding debt amounts previously reported in current maturities were reclassified to long-term based on our ability to refinance these amounts with available borrowing capacity under our March 2007 credit agreement. |
Aggregate annual maturities of long-term debt as of December 31, 2010 are as follows (in millions): 2011—$9.0; 2012—$12.7; 2013—$153.4; 2014—$6.0; 2015—$327.1; thereafter—$356.0.
We have a $675.0 million unsecured revolving senior credit facility, which we refer to as the March 2007 credit agreement, that helps to improve our operating flexibility and take advantage of favorable market conditions. The March 2007 credit agreement provides for (i) an additional $200.0 million in credit upon additional loan commitments by our existing and/or additional lenders, (ii) the ability to extend the maturity date of the revolving credit facility, under certain conditions, at each anniversary of the closing date, and (iii) the interest rate spread and commitment fees applicable to our borrowings under the credit facility. Pricing (0.32% as of December 31, 2010) can range from 0.32% to 0.675% over the London Inter-Bank Offered Rate, or LIBOR, applicable to the currency of denomination of the borrowing and is based on our credit rating as determined by the major rating agencies.
Borrowings under our March 2007 credit agreement are conditioned upon compliance with the following covenants: (i) consolidated funded debt, as defined in the March 2007 credit agreement, must be less than or equal to 3.50 times consolidated EBITDA, as defined in the March 2007 credit agreement, as of the end of any fiscal quarter; (ii) consolidated tangible domestic assets, as defined in the March 2007 credit agreement, must be greater than or equal to $750.0 million for us to make investments in entities and enterprises that are organized outside the U.S.; and (iii) with the exception of liens specified in our March 2007 credit agreement, liens may not attach to assets when the aggregate amount of all indebtedness secured by such liens plus unsecured indebtedness, other than indebtedness incurred by our subsidiaries under the March 2007 credit agreement, would exceed 20% of consolidated net worth, as defined in the March 2007 credit agreement. We believe that as of December 31, 2010, we were, and currently are, in compliance with all of the debt covenants under the March 2007 credit agreement.
In March 2008, we exercised an option under the March 2007 credit agreement to extend the maturity date from March 2012 to March 2013. Lenders representing 87.4% of the commitments, or $590.0 million out of $675.0 million, approved the extension. No other changes to the agreement were part of the extension and no fees, other than attorney fees, were paid. As a result of the extension, $85.0 million and $590.0 million in commitments now have a maturity date of March 2012 and March 2013, respectively.
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There were no borrowings under the March 2007 credit agreement at December 31, 2010. The average interest rate on borrowings under this facility during 2010 was 0.62%.
Our $325.0 million aggregate principal amount of senior notes, issued in January 2005, bear interest at a rate of 5.10%, payable semi-annually on February 1 and August 1 of each year. The effective interest rate on these senior notes is approximately 5.19%. These senior notes mature on February 1, 2015.
On December 10, 2010, we concluded the sale of $350.0 million aggregate principal amount of senior notes through a public offering at a price of 99.101% of par netting us $346.9 million in proceeds. We used $100.0 million of the net proceeds from the sale of these senior notes to fund pension obligations ($50.0 million of which was contributed in December 2010 and $50.0 million in January 2011), with the remainder used to repay other indebtedness. These senior notes bear an interest rate of 4.50%, which is payable semi-annually on June 15 and December 15 of each year, beginning June 15, 2011. The effective interest rate on these senior notes is approximately 4.70%. These senior notes mature on December 15, 2020.
We have an additional agreement with a domestic financial institution that provides immediate borrowings under an uncommitted credit line up to a maximum of $30.0 million. There were no outstanding borrowings under this agreement at either December 31, 2010 or December 31, 2009. The average interest rate on borrowings under this agreement during 2010 and 2009 was 1.85% and 1.10%, respectively.
On December 31, 2010, one of our foreign subsidiaries had an agreement with a foreign bank that provided an immediate, uncommitted credit line, on a short-term basis, up to 70 million Euros. At December 31, 2010, there were outstanding borrowings of 70 million Euros (approximately $92.2 million at December 31, 2010, based on applicable exchange rates) under this agreement. The average rate on borrowings under this agreement was 1.3% at December 31, 2010.
One of our foreign subsidiaries has existing agreements with several foreign banks, which provide immediate borrowings under uncommitted credit lines up to a maximum of 4.5 billion Japanese Yen (approximately $54.6 million at December 31, 2010, based on applicable exchange rates). At December 31, 2010, there were outstanding borrowings under these agreements of $8.2 million. The weighted average interest rate on borrowings under these agreements was 1.19% at December 31, 2010.
Certain of our remaining foreign subsidiaries have additional agreements with foreign institutions that provide immediate uncommitted credit lines, on a short term basis, up to an aggregate maximum of approximately $53.9 million, of which $38.5 million supports foreign subsidiaries based in China. We have guaranteed these agreements. At December 31, 2010, there were $38.5 million in borrowings under these agreements. The weighted average interest rate on borrowings under these agreements was 4.90% at December 31, 2010.
We have the ability to refinance our borrowings under credit lines with borrowings under the March 2007 credit agreement, as applicable. Therefore, these amounts are classified as long-term debt at December 31, 2010 and 2009. At December 31, 2010, we had the ability to borrow an additional $675.0 million under our March 2007 credit agreement.
Our consolidated joint venture JBC has foreign currency denominated debt, which amounted to $46.2 million and $44.4 million at December 31, 2010 and 2009, respectively, and principally includes (i) foreign plant-related construction borrowings maturing in April 2015 amounting to $23.8 million and $28.7 million at December 31, 2010 and 2009, respectively, which bore interest at rates ranging from 4.28% to 7.12% at December 31, 2010, and (ii) a capitalized lease obligation maturing in July 2012 related to certain plant equipment amounting to $5.9 million and $9.7 million at December 31, 2010 and 2009, respectively, bearing interest at 5.5%. At December 31, 2010 and 2009, the JBC debt also included a $6.0 million unsecured non-interest bearing loan from its other shareholder. At December 31, 2010, JBC had additional borrowing capacity of approximately $23.0 million.
NOTE 13—Other Noncurrent Liabilities:
Other noncurrent liabilities consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Liabilities related to uncertain tax positions (a) |
$ | 21,875 | $ | 22,302 | ||||
| Executive deferred compensation plan obligation |
17,763 | 16,884 | ||||||
| Deferred revenue – long-term |
13,918 | 16,354 | ||||||
| Asset retirement obligations (b) |
14,213 | 14,101 | ||||||
| Other |
41,042 | 35,141 | ||||||
| Total |
$ | 108,811 | $ | 104,782 | ||||
| (a) See Note 18, “Income Taxes.” |
||||||||
| (b) See Note 15, “Commitments and Contingencies.” |
||||||||
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NOTE 14—Stock-based Compensation Expense:
Capital Stock and Incentive Plans
Preferred Stock
We have the authority to issue 15,000,000 shares of preferred stock in one or more classes or series. As of December 31, 2010, no shares of preferred stock have been issued.
Stock Purchases
During 2010, we purchased an aggregate of 400,356 shares of our common stock in open-market transactions for $14.9 million at an average price of $37.33 per share. During 2009, we purchased an aggregate of 174,900 shares of our common stock in open-market transactions for $5.8 million at an average price of $33.23 per share. During 2008, we purchased an aggregate of 662,700 shares of our common stock in open-market transactions for $20.1 million at an average price of $30.30 per share. On February 27, 2008, our Board of Directors approved an increase of five million shares authorized for repurchase under our stock repurchase plan. At December 31, 2010, we have authorization to purchase an additional 3,824,744 shares of our common stock.
On February 8, 2008, pursuant to a Stock Purchase Agreement, dated as of February 5, 2008, with each of (i) William M. Gottwald, John D. Gottwald and James T. Gottwald as Trustees of Floyd, Jr.’s Trust, or the Trust, under the will of Floyd D. Gottwald, (ii) Floyd D. Gottwald, Jr. and (iii) Westham Partners, L.P., we purchased an aggregate of 3,000,000 shares of common stock from the Trust, an aggregate of 300,000 shares of common stock from Floyd D. Gottwald, Jr., and an aggregate of 700,000 shares of common stock from Westham Partners, L.P., each at a purchase price of $37.22 per share of common stock. We utilized availability under our March 2007 credit agreement for payment of the total purchase price of approximately $148.9 million for the 4,000,000 shares.
Incentive Plans
We have various share-based compensation plans that authorize the granting of (i) stock options to purchase shares of our common stock, (ii) restricted common stock awards, (iii) performance unit awards and (iv) stock appreciation rights (SARs) to employees and non-employee directors. The plans provide for payment of incentive awards in one or more of the following at our option: cash, shares of our common stock, qualified and non-qualified stock options, SARs, restricted stock awards and performance unit awards. The share-based awards granted by us generally contain vesting provisions ranging from one to five years, and with respect to stock options granted by us, have a term of not more than ten years from the date of grant. Stock options granted to employees generally vest over three years and have a term of ten years. Restricted common stock awards vest in periods ranging from one to five years from the date of grant. Performance unit awards are earned at a level ranging from zero to 200% contingent upon the achievement of specific performance criteria over periods ranging from one to two years. Distribution of the earned units occurs generally 50% upon completion of a one-year measurement period with the remaining 50% of the earned units distributed one year thereafter.
We granted 389,000, 1,255,500 and 65,000 stock options during 2010, 2009 and 2008, respectively. There were no significant modifications made to any share-based grants during these periods.
On April 20, 2010, the maximum number of shares available for issuance to participants under the Albemarle Corporation 2008 Incentive Plan (the “Incentive Plan”) increased by 4,470,000 shares to 7,470,000 shares. With respect to any awards, other than stock options or SARs, the number of shares available for awards under the Incentive Plan were reduced by 1.6 shares for each share covered by such award or to which such award related. Under the Albemarle Corporation 2008 Stock Compensation Plan for Non-Employee Directors (the “Non-Employee Directors Plan”), a maximum aggregate number of 100,000 shares of our common stock was authorized for issuance to the Company’s non-employee directors. The fair market value of shares to be issued to each participant during a calendar year shall not exceed $100,000. At December 31, 2010, there were 5,476,110 shares available for grant under the Incentive Plan and 60,675 shares available for grant under the Non-Employee Directors Plan.
Total stock-based compensation expense associated with our incentive plans for the years ended December 31, 2010, 2009 and 2008 amounted to $15.7 million, $0.3 million and $18.5 million, respectively, and is included in cost of goods sold and selling, general and administrative, or SG&A, expenses on the consolidated statements of income. Total related recognized tax benefits for the years ended December 31, 2010, 2009 and 2008 amounted to $5.8 million, $0.1 million and $6.5 million, respectively. During 2009, we reduced certain of our stock-based compensation accruals in the amount of $7.8 million based on revised estimates of expected
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performance. This accrual reversal served to offset a significant portion of stock-based compensation expense for the year ended December 31, 2009.
The following table summarizes information about the Company’s fixed-price stock options as of and for the year ended December 31, 2010:
| Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term (Years) |
Aggregate Intrinsic Value (in thousands) |
|||||||||||
| Outstanding at December 31, 2009 |
2,226,834 | $ | 19.08 | 6.8 | $ | 38,499 | ||||||||
| Granted |
389,000 | 42.03 | ||||||||||||
| Exercised |
(494,559 | ) | 14.43 | |||||||||||
| Forfeited |
(148,753 | ) | 27.12 | |||||||||||
| Outstanding at December 31, 2010 |
1,972,522 | $ | 24.17 | 7.2 | $ | 62,357 | ||||||||
| Exercisable at December 31, 2010 |
427,775 | $ | 14.33 | 2.5 | $ | 17,730 | ||||||||
The fair value of each option granted during the years ended December 31, 2010, 2009 and 2008 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Dividend yield |
1.66 | % | 2.13 | % | 1.57 | % | ||||||
| Volatility |
33.13 | % | 32.94 | % | 31.32 | % | ||||||
| Average expected life (years) |
6 | 6 | 6 | |||||||||
| Risk-free interest rate |
3.92 | % | 3.37 | % | 4.20 | % | ||||||
| Fair value of options granted |
$ | 13.76 | $ | 6.70 | $ | 6.87 | ||||||
Dividend yield is the average of historical yields and those estimated over the average expected life. The stock volatility is based on historical volatilities of our common stock. The average expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The risk-free interest rate is based on the U.S. Treasury strip rate with stripped coupon interest for the period equal to the contractual term of the share option grant in effect at the time of grant.
The intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008 was $15.1 million, $5.8 million and $8.4 million, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option.
Total compensation cost not yet recognized for nonvested stock options outstanding as of December 31, 2010 is approximately $6.4 million and is expected to be recognized over a remaining weighted-average period of 1.6 years. Cash proceeds from stock options exercised and tax benefit related to stock options exercised, were $7.1 million and $5.5 million for the year ended December 31, 2010. The Company issues new shares of common stock upon exercise of stock options and vesting of restricted common stock awards.
The following table summarizes activity in performance unit awards:
| 2010 | 2009 | 2008 | ||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested, beginning of period |
7,500 | $38.41 | 1,263,500 | $30.04 | 962,000 | $21.53 | ||||||||||||
| Granted |
198,700 | 41.94 | — | — | 1,188,500 | 30.80 | ||||||||||||
| Vested |
(2,947 | ) | 38.41 | (575,890 | ) | 21.60 | (850,500 | ) | 21.53 | |||||||||
| Forfeited |
(19,057 | ) | 41.64 | (680,110 | ) | 37.10 | (36,500 | ) | 28.78 | |||||||||
| Nonvested, end of period |
184,196 | 41.88 | 7,500 | 38.41 | 1,263,500 | 30.04 | ||||||||||||
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Total compensation cost not yet recognized for nonvested performance unit awards outstanding as of December 31, 2010 is approximately $8.9 million and is expected to be recognized over a remaining weighted-average period of 1.5 years. Each performance unit represents one share of common stock. The fair value of the performance based restricted stock was estimated on the date of grant.
The following table summarizes activity in non-performance based restricted stock awards:
| 2010 | 2009 | 2008 | ||||||||||||||||
| Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested, beginning of period |
535,625 | $35.10 | 536,700 | $36.53 | 421,500 | $37.45 | ||||||||||||
| Granted |
92,750 | 40.98 | 88,625 | 21.85 | 147,200 | 32.79 | ||||||||||||
| Vested |
(250,126 | ) | 37.48 | (69,700 | ) | 28.98 | (8,000 | ) | 19.09 | |||||||||
| Forfeited |
(44,833 | ) | 39.43 | (20,000 | ) | 36.03 | (24,000 | ) | 35.54 | |||||||||
| Nonvested, end of period |
333,416 | 34.38 | 535,625 | 35.10 | 536,700 | 36.53 | ||||||||||||
Total compensation cost not yet recognized for nonvested non-performance based restricted shares as of December 31, 2010 is approximately $4.8 million and is expected to be recognized over a remaining weighted-average period of 2.3 years. The fair value of the non-performance based restricted stock was estimated on the date of grant adjusted for a dividend factor, if necessary.
Deferred Directors’ Compensation
Under the 1996 Directors’ Deferred Compensation Plan (as amended and restated in 2005), a maximum aggregate number of 200,000 shares of our common stock is authorized for issuance to the Company’s non-employee directors. In 2009, the Company made a discretionary allocation of 700 shares per director (5,600 common shares) to each director’s deferral account with a one-year minimum deferral period.
NOTE 15—Commitments and Contingencies:
In the ordinary course of business, we have commitments in connection with various activities, the most significant of which are as follows:
Environmental
Environmental liabilities at December 31, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Balance, beginning of year |
$ | 15,567 | $ | 18,970 | $ | 23,116 | ||||||
| Expenditures |
(1,128 | ) | (1,414 | ) | (2,742 | ) | ||||||
| Changes in estimates |
419 | (2,202 | ) | (916 | ) | |||||||
| Foreign currency translation |
(1,052 | ) | 213 | (488 | ) | |||||||
| Balance, end of year |
13,806 | 15,567 | 18,970 | |||||||||
| Less amounts reported in Accrued expenses |
1,661 | 5,775 | 4,605 | |||||||||
| Amounts reported in Other noncurrent liabilities |
$ | 12,145 | $ | 9,792 | $ | 14,365 | ||||||
The amounts recorded represent our future remediation and other anticipated environmental liabilities. Approximately 69% of our recorded liability is related to the closure and post-closure activities at a former landfill associated with our Bergheim, Germany plant, which was recorded at the time of our acquisition of this site in 2001. This closure project has been approved under the authority of the governmental permit for this site and is scheduled for completion in 2017, with post-closure monitoring to occur for 30 years thereafter. The remainder of our recorded liability is associated with sites that are being evaluated under governmental authority but for which final remediation plans have not yet been approved. These liabilities typically arise during the normal course of our operational and environmental management activities or at the time of acquisition of the site, and are based on internal analysis as well as input from outside consultants. As evaluations proceed at each relevant site, changes in risk assessment practices, remediation techniques and regulatory requirements can occur, therefore such liability estimates may be adjusted accordingly. The timing and duration of remediation activities at these sites will be determined when evaluations are completed. Although it is difficult to quantify the potential financial impact of compliance with environmental protection laws, management estimates (based on the latest available information) that there is a reasonable possibility that future environmental remediation costs associated with our past operations, in excess of amounts already recorded, could be up to approximately $16.8 million before income taxes.
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We believe that any sum we may be required to pay in connection with environmental remediation matters in excess of the amounts recorded should occur over a period of time and should not have a material adverse effect upon our results of operations, financial condition or cash flows on a consolidated annual basis although any such sum could have a material adverse impact on our results of operations, financial condition or cash flows in a particular quarterly reporting period.
Rental Expense
Our rental expenses include a capital lease related to machinery and equipment at JBC and a number of operating lease agreements, primarily for office space, transportation equipment and storage facilities. The following schedule details the future non-cancelable minimum lease payments for the next five years and thereafter (in thousands):
| Year |
Minimum Capital Lease Payments |
Minimum Operating Lease Payments |
||||||
| 2011 |
$ | 4,316 | $ | 8,676 | ||||
| 2012 |
2,158 | $ | 6,143 | |||||
| 2013 |
— | $ | 3,963 | |||||
| 2014 |
— | $ | 2,833 | |||||
| 2015 |
— | $ | 2,341 | |||||
| Thereafter |
— | $ | 12,159 | |||||
| Total minimum obligations |
6,474 | |||||||
| Interest |
(601 | ) | ||||||
| Present value of net minimum obligations |
5,873 | |||||||
| Current portion |
(3,860 | ) | ||||||
| Long-term obligations |
$ | 2,013 | ||||||
Rental expense was approximately $29.0 million, $27.3 million, and $30.7 million for 2010, 2009 and 2008, respectively. Rental expense is shown net of rental income which was minimal during 2010, 2009 and 2008.
Litigation
On July 3, 2006, we received a Notice of Violation, or NOV, from the U.S. Environmental Protection Agency Region 4, or EPA, regarding the implementation of the Pharmaceutical Maximum Achievable Control Technology standards at our plant in Orangeburg, South Carolina. The alleged violations include (i) the applicability of the specific regulations to certain intermediates manufactured at the plant, (ii) failure to comply with certain reporting requirements, (iii) improper evaluation and testing to properly implement the regulations and (iv) the sufficiency of the leak detection and repair program at the plant. We are currently engaged in discussions with the EPA seeking to resolve these allegations, but no assurances can be given that we will be able to reach a resolution that is acceptable to both parties. Any settlement or finding adverse to us could result in the payment by us of fines, penalties, capital expenditures, or some combination thereof. At this time, it is not possible to predict with any certainty the outcome of our discussions with the EPA or the financial impact, which may result therefrom. However, we do not expect any financial impact to have a material adverse effect on the results of operations or the financial position of the Company.
In addition, we are involved from time to time in legal proceedings of types regarded as common in our businesses, including administrative or judicial proceedings seeking remediation under environmental laws, such as Superfund, products liability and premises liability litigation. Where appropriate, we may establish financial reserves as estimated by our general counsel for such proceedings. We also maintain insurance to mitigate certain of such risks.
Other
The following table summarizes our unused letters of credit and guarantee agreements (in thousands):
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | |||||||||||||||||||
| Letters of credit and guarantees |
$ | 19,803 | $ | 1,807 | $ | 7,004 | $ | — | $ | — | $ | 5,621 | ||||||||||||
The Company has standby letters of credit and guarantees with various financial institutions. At December 31, 2010, the Company had $34.2 million of outstanding letters of credit and guarantees. The outstanding letters of credit are primarily related to
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performance bonds, environmental guarantees and insurance claim payment guarantees with expiration dates ranging from 2011 to 2017.
The majority of the Company’s guarantees relates to custom and port authorities that have expiration dates ranging from one year to three years. The guarantees arose during the ordinary course of business. We do not have recorded reserves for the letters of credit and guarantees as of December 31, 2010. We are unable to estimate the maximum potential amount of the potential future liability under guarantees and letters of credit. However, we accrue for any potential loss for which we believe a future payment is probable and a range of loss can be reasonably estimated. We believe our liability under such obligations is immaterial.
In connection with our remediation of a local landfill site as required by the German environmental authorities, we have pledged certain of our land and housing facilities at our Bergheim, Germany plant site with a recorded value of $5.9 million.
We had asset retirement obligations of $14.2 million and $14.1 million at December 31, 2010 and 2009, respectively, associated with certain property and equipment. During 2010, we recorded a minimal amount of new asset retirement obligations, and the increase from December 31, 2009 is primarily related to accretion expense recorded during 2010. We have not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in our consolidated financial statements. It is the opinion of our management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on our consolidated financial statements based on current costs.
We currently and are, from time to time, subject to sales and use tax audits in various taxing jurisdictions in the United States and to customs audits globally. We do not expect the financial impact of any of these audits to have a material adverse effect on the financial position of the Company.
NOTE 16—Accumulated Other Comprehensive Loss:
Accumulated other comprehensive loss consists of the following (in thousands):
| 2010 | 2009 | |||||||
| Foreign currency translation adjustments (net of current and deferred taxes: 2010—$17,517; |
||||||||
| 2009—$11,508) |
$ | 69,605 | $ | 132,234 | ||||
| Defined benefit pension plans and postretirement plans: |
||||||||
| Net transition asset (net of deferred taxes: 2010—$0; 2009—$3) |
— | 6 | ||||||
| Net prior service benefit (net of deferred taxes: 2010—$3,547; 2009—$4,670) |
6,431 | 8,286 | ||||||
| Net benefit plan loss (net of deferred taxes: 2010—$131,569; 2009—$126,613) |
(239,094 | ) | (231,143 | ) | ||||
| Other (net of deferred taxes: 2010—$694; 2009—$753) |
(1,138 | ) | (1,243 | ) | ||||
| Total |
$ | (164,196 | ) | $ | (91,860 | ) | ||
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NOTE 17—Pension Plans and Other Postretirement Benefits:
We have certain noncontributory defined benefit pension plans covering certain U.S., German, Japanese, and the Netherlands employees. We also have a contributory defined benefit plan covering certain Belgian employees. The benefits for these plans are based primarily on compensation and/or years of service. The funding policy for each plan complies with the requirements of relevant governmental laws and regulations. The pension information for all periods presented includes amounts related to salaried and hourly plans.
During 2009, the U.S. defined benefit pension plans were amended to be in compliance with the Pension Protection Act of 2006 (PPA), which was signed into law on August 16, 2006. This law amended the Employee Retirement Income Security Act of 1974 (ERISA) and included new rules regarding methods and assumptions, including measuring the benefit obligation and plan assets, use of interest rate assumptions, mortality tables, valuation date, credit balances for carryover, and pre-funded balances, etc.
Our U.S. defined benefit plan for non-represented employees was closed to new participants effective March 31, 2004. In 2005, the defined benefit plan for non-represented employees was amended to provide that for participants who retire on or after December 31, 2010, final average earnings shall be determined as of December 31, 2010; for participants who retire on or after December 31, 2015, final average earnings shall be determined as of December 31, 2012; and for participants who retire on or after December 31, 2020, final average earnings shall be determined as of December 31, 2014.
In 2010, the defined benefit plan for non-represented employees was further amended to delay the initial actions of the previous amendment by one year. The new amendment provides that for participants who retire on or after December 31, 2011, final average earnings shall be determined as of December 31, 2011; for participants who retire on or after December 31, 2015, final average earnings shall be determined as of December 31, 2012; and for participants who retire on or after December 31, 2020, final average earnings shall be determined as of December 31, 2014.
On March 31, 2004, a new defined contribution pension plan for U.S. non-represented employees hired after March 31, 2004 was adopted. The annual contribution to the defined contribution plan is based on 5% of eligible employee compensation and was amended January 1, 2007 to increase the pension contributions to 6% and 7% for certain employees depending on years of service. Contributions amounted to $3.9 million, $3.5 million and $3.4 million in 2010, 2009 and 2008, respectively. We also have a defined contribution pension plan for employees in the United Kingdom. The annual contribution to the United Kingdom defined contribution plan is based on a percentage of eligible employee compensation and amounted to $0.4 million, $0.4 million and $0.6 million for 2010, 2009 and 2008, respectively.
We have two benefit plans that cover employees in the Netherlands—a defined benefit plan and a plan similar to a collective defined contribution plan. Our defined benefit plan is a transitional arrangement in which benefits are based primarily on employee compensation and/or years of service. This plan is for certain individuals born on or before 1949 whom had a prior agreement, which we elected to honor, in connection with the refinery catalysts business acquisition in 2004. The collective defined contribution plan is supported by annuity contracts through an insurance company. The insurance company unconditionally undertakes the legal obligation to provide specific benefits to specific individuals in return for a fixed amount of premiums. Our obligation under this plan is limited to a variable calculated employer match for each participant plus an additional fixed amount of contributions to assist in covering estimated cost of living and salary increases (indexing) and administrative costs for the overall plan. We paid approximately $8.8 million, $9.0 million and $10.3 million in 2010, 2009 and 2008, respectively, in annual premiums and related costs pertaining to this plan.
Pension coverage for the employees of our other foreign subsidiaries is provided through separate plans. The plans are funded in conformity with the funding requirements of applicable governmental regulations. The pension cost, actuarial present value of benefit obligations and plan assets for all plans are combined in the other pension disclosure information presented.
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The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans, as well as a summary of significant assumptions for our pension benefit plans (in thousands):
| Total
Pension Benefits 2010 |
Domestic
Pension Benefits 2010 |
Total
Pension Benefits 2009 |
Domestic
Pension Benefits 2009 |
|||||||||||||
| Change in benefit obligations: |
||||||||||||||||
| Benefit obligation at January 1 |
$ | 570,871 | $ | 526,478 | $ | 518,138 | $ | 479,138 | ||||||||
| Service cost |
11,271 | 9,577 | 10,568 | 8,544 | ||||||||||||
| Interest cost |
31,844 | 29,934 | 32,967 | 30,608 | ||||||||||||
| Plan amendments |
288 | 288 | — | — | ||||||||||||
| Actuarial loss |
40,289 | 40,124 | 46,840 | 39,139 | ||||||||||||
| Benefits paid |
(37,528 | ) | (33,438 | ) | (38,240 | ) | (30,951 | ) | ||||||||
| Employee contributions |
258 | — | 285 | — | ||||||||||||
| Foreign exchange loss (gain) |
(3,413 | ) | — | 313 | — | |||||||||||
| Benefit obligation at December 31 |
$ | 613,880 | $ | 572,963 | $ | 570,871 | $ | 526,478 | ||||||||
| Change in plan assets: |
||||||||||||||||
| Fair value of plan assets at January 1 |
$ | 417,125 | $ | 410,037 | $ | 366,061 | $ | 360,597 | ||||||||
| Actual return on plan assets |
50,988 | 50,471 | 52,482 | 51,430 | ||||||||||||
| Employer contributions |
76,841 | 71,897 | 36,449 | 28,961 | ||||||||||||
| Benefits paid |
(37,528 | ) | (33,438 | ) | (38,240 | ) | (30,951 | ) | ||||||||
| Employee contributions |
258 | — | 285 | — | ||||||||||||
| Foreign exchange gain (loss) |
(620 | ) | — | 88 | — | |||||||||||
| Fair value of plan assets at December 31 |
$ | 507,064 | $ | 498,967 | $ | 417,125 | $ | 410,037 | ||||||||
| Funded status |
$ | (106,816 | ) | $ | (73,996 | ) | $ | (153,746 | ) | $ | (116,441 | ) | ||||
| Amounts recognized in consolidated balance sheets: |
||||||||||||||||
| Current liabilities (accrued expenses) |
$ | (3,980 | ) | $ | (1,332 | ) | $ | (5,248 | ) | $ | (1,582 | ) | ||||
| Noncurrent liabilities (pension benefits) |
(102,836 | ) | (72,664 | ) | (148,498 | ) | (114,859 | ) | ||||||||
| Net pension liability at December 31 |
$ | (106,816 | ) | $ | (73,996 | ) | $ | (153,746 | ) | $ | (116,441 | ) | ||||
| Amounts recognized in accumulated other comprehensive loss: |
||||||||||||||||
| Transition asset |
$ | — | $ | — | $ | (9 | ) | $ | (9 | ) | ||||||
| Prior service benefit |
(8,661 | ) | (9,141 | ) | (9,935 | ) | (10,467 | ) | ||||||||
| Net actuarial loss |
351,778 | 346,699 | 337,946 | 331,637 | ||||||||||||
| Net amount recognized at December 31 |
$ | 343,117 | $ | 337,558 | $ | 328,002 | $ | 321,161 | ||||||||
| Weighted-average assumption percentages as of December 31: |
||||||||||||||||
| Discount rate |
5.40% | 5.45% | 5.77% | 5.86% | ||||||||||||
| Rate of compensation increase |
3.93% | 4.11% | 3.90% | 4.11% | ||||||||||||
The accumulated benefit obligation for all defined benefit pension plans was $598.6 million and $554.1 million at December 31, 2010 and 2009, respectively.
Postretirement medical benefits and life insurance is provided for certain groups of U.S. retired employees. Medical and life insurance benefit costs have been funded principally on a pay-as-you-go basis. Although the availability of medical coverage after retirement varies for different groups of employees, the majority of employees who retire before becoming eligible for Medicare can continue group coverage by paying a portion of the cost of a monthly premium designed to cover the claims incurred by retired employees subject to a cap on payments allowed. The availability of group coverage for Medicare-eligible retirees also varies by employee group with coverage designed either to supplement or coordinate with Medicare. Retirees generally pay a portion of the cost of the coverage. Plan assets for retiree life insurance are held under an insurance contract and are reserved for retiree life insurance benefits. In 2005, the postretirement medical benefit available to U.S. employees was changed to provide that employees who are under age 50 as of December 31, 2005 would no longer be eligible for a company paid retiree medical premium subsidy. Employees who are of age 50 and above as of December 31, 2005 and who retire after January 1, 2006 will have their retiree medical premium subsidy capped. Effective January 1, 2008, our medical insurance for certain groups of U.S. retired employees is now insured through a medical carrier.
In connection with the acquisition of the refinery catalysts business in 2004, we assumed the obligation for postretirement medical benefits for employees in the Netherlands who will retire after August 2009. The benefit costs are funded principally on a pay-as-you-go basis. However, effective January 1, 2007, the Netherlands postretirement plan was terminated.
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The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans, as well as a summary of significant assumptions for our postretirement benefit plans (in thousands):
| Total Other Postretirement Benefits 2010 |
Total Other Postretirement Benefits 2009 |
|||||||
| Change in benefit obligations: |
||||||||
| Benefit obligation at January 1 |
$ | 65,739 | $ | 59,325 | ||||
| Service cost |
382 | 438 | ||||||
| Interest cost |
3,564 | 3,769 | ||||||
| Actuarial loss |
552 | 6,862 | ||||||
| Benefits paid |
(3,801 | ) | (4,655 | ) | ||||
| Benefit obligation at December 31 |
$ | 66,436 | $ | 65,739 | ||||
| Change in plan assets: |
||||||||
| Fair value of plan assets at January 1 |
$ | 8,207 | $ | 8,821 | ||||
| Actual return on plan assets |
315 | 790 | ||||||
| Employer contributions |
3,264 | 3,251 | ||||||
| Benefits paid |
(3,801 | ) | (4,655 | ) | ||||
| Fair value of plan assets at December 31 |
$ | 7,985 | $ | 8,207 | ||||
| Funded status |
$ | (58,451 | ) | $ | (57,532 | ) | ||
| Amounts recognized in consolidated balance sheets: |
||||||||
| Current liabilities (accrued expenses) |
$ | (3,437 | ) | $ | (3,681 | ) | ||
| Noncurrent liabilities (postretirement benefits) |
(55,014 | ) | (53,851 | ) | ||||
| Net postretirement liability at December 31 |
$ | (58,451 | ) | $ | (57,532 | ) | ||
| Amounts recognized in accumulated other comprehensive loss: |
||||||||
| Prior service benefit |
(1,317 | ) | (3,021 | ) | ||||
| Net actuarial loss |
18,885 | 19,810 | ||||||
| Net amount recognized at December 31 |
$ | 17,568 | $ | 16,789 | ||||
| Weighted-average assumption percentages as of December 31: |
||||||||
| Discount rate |
5.30% | 5.70% | ||||||
| Rate of compensation increase |
4.00% | 4.00% | ||||||
The components of pension benefits expense are as follows (in thousands):
| Total Pension Benefits 2010 |
Domestic Pension Benefits 2010 |
Total Pension Benefits 2009 |
Domestic Pension Benefits 2009 |
Total Pension Benefits 2008 |
Domestic Pension Benefits 2008 |
|||||||||||||||||||
| Service cost |
$ | 11,271 | $ | 9,577 | $ | 10,568 | $ | 8,544 | $ | 12,241 | $ | 9,942 | ||||||||||||
| Interest cost |
31,844 | 29,934 | 32,967 | 30,608 | 31,679 | 29,543 | ||||||||||||||||||
| Expected return on assets |
(41,941 | ) | (41,630 | ) | (42,341 | ) | (42,080 | ) | (42,003 | ) | (41,753 | ) | ||||||||||||
| Plan curtailments/settlement, termination benefits and termination of insurer contracts* |
— | — | — | — | (1,442 | ) | — | |||||||||||||||||
| Amortization of transition asset |
(9 | ) | (9 | ) | (10 | ) | (10 | ) | (10 | ) | (10 | ) | ||||||||||||
| Amortization of prior service benefit |
(986 | ) | (1,038 | ) | (984 | ) | (1,039 | ) | (1,021 | ) | (1,085 | ) | ||||||||||||
| Amortization of loss |
17,410 | 16,222 | 12,348 | 11,440 | 7,808 | 8,594 | ||||||||||||||||||
| Benefits expense |
$ | 17,589 | $ | 13,056 | $ | 12,548 | $ | 7,463 | $ | 7,252 | $ | 5,231 | ||||||||||||
| Weighted-average assumption percentages: |
||||||||||||||||||||||||
| Discount rate |
5.77% | 5.86% | 6.45% | 6.50% | 6.39% | 6.50% | ||||||||||||||||||
| Expected return on plan assets |
8.19% | 8.25% | 8.69% | 8.75% | 8.71% | 8.75% | ||||||||||||||||||
| Rate of compensation increase |
3.90% | 4.11% | 4.11% | 4.33% | 4.10% | 4.25% | ||||||||||||||||||
| * | During the fourth quarter ended December 31, 2008, in connection with the disposition of the Port de Bouc, France facility effective December 31, 2008, our pension liability on such date was transferred to the new owner. |
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The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic pension costs during 2011 are as follows (in thousands):
| Total Pension Benefits |
Domestic Pension Benefits |
|||||||
| Amortization of prior service benefit |
$ | (958) | $ | (1,011) | ||||
| Amortization of net actuarial loss |
$ | 25,892 | $ | 24,752 | ||||
The components of postretirement benefits expense (income) are as follows (in thousands):
| Total Other Postretirement Benefits 2010 |
Total Other Postretirement Benefits 2009 |
Total Other Postretirement Benefits 2008 |
||||||||||
| Service cost |
$ | 382 | $ | 438 | $ | 446 | ||||||
| Interest cost |
3,564 | 3,769 | 3,310 | |||||||||
| Expected return on assets |
(526 | ) | (571 | ) | (572 | ) | ||||||
| Amortization of prior service benefit |
(1,704 | ) | (7,572 | ) | (9,598 | ) | ||||||
| Amortization of loss |
1,688 | 1,096 | 351 | |||||||||
| Benefits expense (income) |
$ | 3,404 | $ | (2,840 | ) | $ | (6,063 | ) | ||||
| Weighted-average assumption percentages: |
||||||||||||
| Discount rate |
5.70% | 6.55% | 6.40% | |||||||||
| Expected return on plan assets |
7.00% | 7.00% | 7.00% | |||||||||
| Rate of compensation increase |
4.00% | 4.25% | 4.25% | |||||||||
The estimated amounts to be amortized from accumulated other comprehensive loss into net periodic postretirement costs during 2011 are as follows (in thousands):
| Total Other Postretirement Benefits |
||||
| Amortization of prior service benefit |
$ | (697 | ) | |
| Amortization of net actuarial loss |
$ | 2,263 | ||
In estimating the expected return on plan assets, consideration is given to past performance and future performance expectations for the types of investments held by the plan, as well as the expected long term allocations of plan assets to these investments. The expected rates of return on plan assets for our domestic pension plans decreased from 8.75% at December 31, 2009 to 8.25% at December 31, 2010. There has been no change to the assumed rate of return on our domestic pension plan assets effective January 1, 2011. At December 31, 2010 and 2009, the expected rate of return on plan assets for our other postretirement benefit plan was 7.00%. At December 31, 2010 and 2009, the weighted-average expected rate of return on pension plan assets for foreign plans was 4.50%.
In December 2008, new accounting guidance was issued regarding employers’ disclosures about postretirement benefit plan assets. This new guidance is effective for fiscal years ending after December 15, 2009 and requires additional disclosures regarding benefit plan assets including (a) the investment allocation decision process, (b) the fair value of each major category of plan assets and (c) the inputs and valuation techniques used to measure the fair value of plan assets. We have adopted this guidance and have provided the additional disclosures required upon adoption.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
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| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or | |
| Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or | ||
| Inputs other than quoted prices that are observable for the asset or liability | ||
| Level 3 | Unobservable inputs for the asset or liability | |
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Investments for which market quotations are readily available are valued at the closing price on the last business day of the year. Listed securities for which no sale was reported on such date are valued at the mean between the last reported bid and asked price. Securities traded in the over-the-counter market are valued at the closing price on the last business day of the year or at bid price. The net asset value of shares or units is based on the quoted market value of the underlying assets. The market value of corporate bonds is based on institutional trading lots and is most often reflective of bid price. Government securities are valued at the mean between bid and ask prices. Holdings in private investment companies are typically valued using the net asset valuations provided by the underlying private investment companies.
The following table sets forth our financial assets that were accounted for at fair value on a recurring basis as of December 31, 2010 (in thousands):
| December 31, 2010 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Quoted Prices in Active Markets for Similar Items (Level 2) |
Unobservable Inputs (Level 3) |
|||||||||||||
| Pension Assets: |
||||||||||||||||
| Domestic Equity(a) |
$ | 203,775 | $ | 143,384 | $ | 60,391 | $ | — | ||||||||
| International Equity(b) |
91,239 | — | 91,239 | — | ||||||||||||
| Fixed Income(c) |
108,471 | 38,859 | 69,612 | — | ||||||||||||
| Absolute Return(d) |
100,533 | 30,816 | 318 | 69,399 | ||||||||||||
| Cash |
3,046 | 3,046 | – | — | ||||||||||||
| Total Pension Assets |
$ | 507,064 | $ | 216,105 | $ | 221,560 | $ | 69,399 | ||||||||
| Postretirement Assets: |
||||||||||||||||
| Fixed Income(c) |
$ | 7,985 | $ | — | $ | 7,985 | $ | — | ||||||||
| (a) | Consists primarily of U.S. equity securities covering a diverse group of companies and U.S. stock funds that primarily track or are actively managed and measured against indices including the S&P 500 and the Russell 2000. |
| (b) | Consists primarily of international equity funds which include stocks and debt obligations of non-U.S. entities that primarily track or are actively managed and measured against various MSCI indices. |
| (c) | Consists primarily of fixed income mutual funds, corporate bonds, U.S. Treasury notes, other government securities and insurance policies. |
| (d) | Consists primarily of holdings in private investment companies. See additional information about the Absolute Return investments below. |
The table below sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2010 (in thousands):
| Absolute Return |
||||
| Beginning Balance |
$ | 65,902 | ||
| Total gains relating to assets sold during the period(a) |
79 | |||
| Total unrealized gains relating to assets still held at the reporting date(a) |
4,537 | |||
| Purchases, sales, issuances, and settlements (net) |
(1,119 | ) | ||
| Ending Balance |
$ | 69,399 | ||
| (a) | These gains (losses) are recognized in the consolidated balance sheets and are included as changes in plan assets in the tables above. |
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The following table sets forth our financial assets that were accounted for at fair value on a recurring basis as of December 31, 2009 (in thousands):
| December 31, 2009 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Quoted Prices in Active Markets for Similar Items (Level 2) |
Unobservable Inputs (Level 3) |
|||||||||||||
| Pension Assets: |
||||||||||||||||
| Domestic Equity(a) |
$ | 151,750 | $ | 135,280 | $ | 16,470 | $ | — | ||||||||
| International Equity(b)(c) |
67,050 | — | 67,050 | — | ||||||||||||
| Fixed Income(d) |
62,917 | 606 | 62,311 | — | ||||||||||||
| Absolute Return(e) |
92,797 | 26,466 | 429 | 65,902 | ||||||||||||
| Cash |
42,611 | 42,611 | — | — | ||||||||||||
| Total Pension Assets |
$ | 417,125 | $ | 204,963 | $ | 146,260 | $ | 65,902 | ||||||||
| Postretirement Assets: |
||||||||||||||||
| Fixed Income(d) |
$ | 8,207 | $ | — | $ | 8,207 | $ | — | ||||||||
| (a) | Consists primarily of U.S. equity securities covering a diverse group of companies and U.S. stock funds that primarily track or are actively managed and measured against indices including the S&P 500 and the Russell 2000. |
| (b) | During 2010, we made an adjustment to previously reported amounts to correct the classification between Level 1 and Level 2 for certain assets in our international equity funds. This adjustment, individually or in the aggregate, did not have a material impact on the reported financial statements for the year ended December 31, 2009. Additionally, had this adjustment been recorded in the prior periods to which it relates, the impact would not have affected total assets, net income attributable to Albemarle Corporation, or earnings per share. |
| (c) | Consists primarily of international equity funds which include stocks and debt obligations of non-U.S. entities that primarily track or are actively managed and measured against various MSCI indices. |
| (d) | Consists primarily of fixed income mutual funds, corporate bonds, U.S. Treasury notes, other government securities and insurance policies. |
| (e) | Consists primarily of holdings in private investment companies. See additional information about the Absolute Return investments below. |
The table below sets forth a summary of changes in the fair value of the plans’ Level 3 assets for the year ended December 31, 2009 (in thousands):
| Absolute | ||||
| Return | ||||
| Beginning Balance |
$ | 88,828 | ||
| Total losses relating to assets sold during the period(a) |
(480 | ) | ||
| Total unrealized gains relating to assets still held at the reporting date(a) |
3,863 | |||
| Purchases, sales, issuances, and settlements (net) |
(26,309 | ) | ||
| Ending Balance |
$ | 65,902 | ||
| (a) | These gains (losses) are recognized in the consolidated balance sheets and are included as changes in plan assets in the tables above. |
The investment objective of the U.S. pension plan assets is maximum return with a strong emphasis on preservation of capital. Assets should participate in rising markets, with defensive action in declining markets expected to an even greater degree. Target asset allocations include 60% in long equity holdings and the remaining 40% in asset classes that provide diversification from traditional long equity holdings. Depending on market conditions, the broad asset class targets may range up or down by approximately 10%. These asset classes include, but are not limited to hedge fund of funds, bonds and other fixed income vehicles, high yield equities and distressed debt.
Our Absolute Return investments consist primarily of our investments in hedge fund of funds. These are holdings in private investment companies with fair values that are based on significant unobservable inputs including assumptions where there is little, if any, market activity for the investment. Investment managers or fund managers associated with these investments provide valuations of the investments on a monthly basis utilizing the net asset valuation approach for determining fair values. These valuations are reviewed by the Company for reasonableness based on applicable sector, benchmark and company performance to validate the appropriateness of the net asset values as a fair value measurement. Where available, audited financial statements are obtained and reviewed for the investments as support for the manager’s investment valuation. In general, the investment objective of these funds is high risk-adjusted returns with an emphasis on preservation of capital. The investment strategies of each of the funds vary; however, the objective of our Absolute Return investments is complementary to the overall investment objective of our U.S. pension plan assets.
At December 31, 2010 and 2009, equity securities held by our pension and other postretirement benefit plans did not include Albemarle common stock.
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On January 3, 2011, we made a $50.0 million contribution to our domestic qualified pension plans. We expect additional 2011 contributions to our domestic nonqualified and foreign qualified and nonqualified pension plans to approximate $4.6 million. Also, we expect to pay approximately $3.3 million in premiums to our U.S. postretirement benefit plan in 2011. However, we may choose to make additional voluntary pension contributions in excess of these amounts.
The current forecast of benefit payments, which reflect expected future service, amounts to (in millions):
| Total Pension Benefits |
Domestic Pension Benefits |
Total Postretirement Benefits |
||||||||||
| 2011 |
$ | 34.7 | $ | 31.9 | $ | 4.8 | ||||||
| 2012 |
$ | 48.4 | $ | 45.7 | $ | 5.3 | ||||||
| 2013 |
$ | 37.5 | $ | 34.8 | $ | 5.3 | ||||||
| 2014 |
$ | 39.2 | $ | 36.1 | $ | 5.2 | ||||||
| 2015 |
$ | 39.1 | $ | 37.3 | $ | 5.2 | ||||||
| 2016-2020 |
$ | 224.8 | $ | 213.7 | $ | 24.8 | ||||||
We have a supplemental executive retirement plan, or SERP, which provides unfunded supplemental retirement benefits to certain management or highly compensated employees. The SERP provides for incremental pension payments to offset the limitations imposed by federal income tax regulations. Expenses relating to the SERP of $3.6 million, $3.6 million and $4.3 million were recorded for the years ended December 31, 2010, 2009 and 2008, respectively. The projected benefit obligation for the SERP recognized in the consolidated balance sheets at December 31, 2010 and 2009 was $28.2 million and $26.8 million, respectively. The benefit expenses and obligations of this SERP are included in the tables above. Benefits of $1.3 million are expected to be paid to SERP retirees in 2011. In 2005, the SERP was amended to reflect the same changes as the U.S. qualified defined benefit plan. For participants who retire on or after December 31, 2010, final average earnings shall be determined as of December 31, 2010, except that for participants who retire on or after December 15, 2015, final average earnings shall be determined as of December 31, 2012, and for participants who retire on or after December 31, 2020, final average earnings shall be determined as of December 31, 2014. In 2010, the SERP was further amended to delay the initial actions of the previous amendment by one year. The new amendment provides that for participants who retire on or after December 31, 2011, final average earnings shall be determined as of December 31, 2011; for participants who retire on or after December 31, 2015, final average earnings shall be determined as of December 31, 2012; and for participants who retire on or after December 31, 2020, final average earnings shall be determined as of December 31, 2014.
In selecting the rate of increase in the per capita cost of covered health care benefits, we consider past performance and forecasts of future health care cost trends. At December 31, 2010, the previously assumed ultimate rate of increase in the per capita cost of covered health care benefits for U.S. retirees remained unchanged. For 2011, the assumed trend rate for pre-65 coverage is 7.5% per year, decreasing to an ultimate rate of 5.0% in the year 2019. The 2011 assumed trend rate for post-65 coverage is 12.0% per year, decreasing to an ultimate rate of 5.0% in the year 2020.
A 1% increase or decrease in the U.S. health care cost trend rate would not have a material effect on the benefit obligation and service and interest benefit cost components.
Other Postemployment Benefits
Certain postemployment benefits to former or inactive employees who are not retirees are funded on a pay-as-you-go basis. These benefits include salary continuance, severance and disability health care and life insurance, which are accounted in accordance with authoritative guidance. The accrued postemployment benefit liability was $0.7 million and $0.3 million at December 31, 2010 and 2009, respectively.
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NOTE 18—Income Taxes:
Income before income taxes and equity in net income of unconsolidated investments and current and deferred income tax expense (benefit) are composed of the following (in thousands):
| Year Ended December 31 | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Income before income taxes and equity in net income of unconsolidated investments: |
||||||||||||
| Domestic |
$ | 235,222 | $ | 103,050 | $ | 88,162 | ||||||
| Foreign |
156,881 | 57,223 | 95,181 | |||||||||
| Total |
$ | 392,103 | $ | 160,273 | $ | 183,343 | ||||||
| Current income tax expense (benefit): |
||||||||||||
| Federal(a) |
$ | 14,620 | $ | (23,908) | $ | (17,165) | ||||||
| State |
5,224 | 772 | (260) | |||||||||
| Foreign |
25,776 | 14,388 | 22,934 | |||||||||
| Total |
$ | 45,620 | $ | (8,748) | $ | 5,509 | ||||||
| Deferred income tax expense (benefit): |
||||||||||||
| Federal |
$ | 57,194 | $ | 29,618 | $ | (772) | ||||||
| State |
(691) | 1,341 | (879) | |||||||||
| Foreign |
(9,404) | (29,239) | (10,397) | |||||||||
| Total |
$ | 47,099 | $ | 1,720 | $ | (12,048) | ||||||
| Total income tax expense (benefit) |
$ | 92,719 | $ | (7,028) | $ | (6,539) | ||||||
| (a) | Current income tax expense – Federal for the year ended December 31, 2010 is net of a tax benefit from an NOL carryforward of $9.6 million. |
The significant differences between the U.S. federal statutory rate and the effective income tax rate are as follows:
| % of Income Before Income Taxes | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
| State taxes, net of federal tax benefit |
1.3 | 1.1 | (0.5 | ) | ||||||||
| Change in valuation allowance |
(0.4 | ) | (0.9 | ) | 14.6 | (a) | ||||||
| Impact of foreign earnings, net(b) |
(9.4 | )(f) | (22.6 | ) | (26.0 | ) | ||||||
| Effect of net income attributable to noncontrolling interests |
— | (0.8 | ) | (0.8 | ) | |||||||
| Loss on investment in foreign operations |
— | — | (11.4 | )(c) | ||||||||
| Effect of completing domestic audits |
— | 5.7 | (e) | 0.8 | (d) | |||||||
| Depletion |
(1.0 | ) | (1.7 | ) | (2.6 | ) | ||||||
| Revaluation of unrecognized tax benefits/reserve requirements |
0.1 | (19.7 | )(e) | (11.2 | )(d) | |||||||
| Manufacturer tax deduction |
(1.6 | ) | — | (g) | — | (g) | ||||||
| Other items, net |
(0.4 | ) | (0.5 | ) | (1.5 | ) | ||||||
| Effective income tax rate |
23.6 | % | (4.4 | )% | (3.6 | )% | ||||||
| (a) | In 2008, we recorded valuation allowances of $26.7 million, which is predominantly related to the divestiture of our Port de Bouc, France operations, that will more likely than not expire unused. |
| (b) | In prior years, we designated the undistributed earnings of substantially all of our foreign subsidiaries as permanently reinvested. The benefit of the lower tax rates in the jurisdictions for which we made this designation have been reflected in our effective income tax rate. During 2010, 2009 and 2008, we received distributions of $68.7 million, $6.1 million and $35.1 million, respectively, from various foreign subsidiaries and joint ventures and realized an (expense) benefit, net of foreign tax credits, of $(2.7) million, $(0.2) million and $2.5 million, respectively, related to the repatriation of these high taxed earnings. We have asserted for all periods being reported, permanent reinvestment of our share of the income of JBC, a Free Zones company under the laws of the Hashemite Kingdom of Jordan. The applicable provisions of the |
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| Jordanian law, and applicable regulations thereunder, do not have a termination provision and the exemption is permanent. As a Free Zones company, JBC is not subject to income taxes on the profits of products exported from Jordan and currently all of the profits are from exports. |
| (c) | In December 2008, we sold substantially all of the Port de Bouc, France operations. This resulted in a domestic worthless stock deduction of $20.9 million. |
| (d) | During 2008, the completion of Internal Revenue Service, or IRS, tax audits from 2000 through 2004 tax years provided a net benefit of $32.4 million offset by the establishment of a tax reserve of $6.9 million due to changes in tax rules and a tax reserve of $5.8 million related to the divestiture of our Port de Bouc operations. |
| (e) | During 2009, the completion of IRS tax audits from 2005 through 2007 tax years provided a net benefit of $19.5 million. |
| (f) | The percentage impact of foreign earnings decreased significantly due to higher domestic earnings. |
| (g) | In 2008 and 2009, limitations imposed by our domestic taxable income precluded us from claiming the manufacturer tax deduction. |
The deferred income tax assets and (liabilities) recorded on the consolidated balance sheets as of December 31, 2010 and 2009 consist of the following (in thousands):
| 2010 | 2009 | |||||||
| Deferred tax assets: |
||||||||
| Postretirement benefits other than pensions |
$ | 15,332 | $ | 14,437 | ||||
| Accrued employee benefits |
22,682 | 18,761 | ||||||
| Operating loss carryovers |
84,185 | 93,907 | ||||||
| Pensions |
32,335 | 47,799 | ||||||
| Tax credit carryovers |
43,856 | 69,482 | ||||||
| Other |
24,330 | 22,974 | ||||||
| Gross deferred tax assets |
222,720 | 267,360 | ||||||
| Valuation allowance |
(39,802) | (41,355) | ||||||
| Deferred tax assets |
182,918 | 226,005 | ||||||
| Deferred tax liabilities: |
||||||||
| Depreciation |
(197,123) | (208,265) | ||||||
| Foreign currency translation adjustments |
(13,077) | (6,845) | ||||||
| Other |
(15,193) | (11,797) | ||||||
| Deferred tax liabilities |
(225,393) | (226,907) | ||||||
| Net deferred tax liabilities |
$ | (42,475) | $ | (902) | ||||
| Classification in the consolidated balance sheets: |
||||||||
| Current deferred tax assets |
$ | 4,689 | $ | 9,322 | ||||
| Current deferred tax liabilities |
(2,223) | (2,450) | ||||||
| Noncurrent deferred tax assets |
64,629 | 73,667 | ||||||
| Noncurrent deferred tax liabilities |
(109,570) | (81,441) | ||||||
| Net deferred tax liabilities |
$ | (42,475) | $ | (902) | ||||
At December 31, 2010, we had approximately $49.7 million domestic credits available to offset future payments of income taxes, expiring in varying amounts between 2016 and 2026. We have established valuation allowances for $3.4 million of those domestic credits since we believe that it is more likely than not that the related deferred tax assets will not be realized. We believe that sufficient taxable income will be generated during the carryover period in order to utilize the other remaining credit carryovers. Upon utilization of these credits, $6.4 million will be recorded in additional paid in capital related to the realization of tax benefits for stock based compensation.
At December 31, 2010, we have $5.2 million of domestic net operating losses and $249.2 million of foreign net operating loss carryovers. We have established valuation allowances for $92.7 million of those foreign operating loss carryovers since we believe that it is more likely than not that the related deferred tax assets will not be realized. The realization of the deferred tax assets is
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dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions. Although realization is not assured, we believe it is more likely than not that the remaining deferred tax assets will be realized. However, the amount considered realizable could be reduced if estimates of future taxable income change. We have recorded a $6.1 million deferred tax asset relating to capital loss carryovers. We have established a valuation allowance of $6.1 million, as we believe it is more likely than not that the deferred tax asset will not be realized during the carryover period. We believe that it is more likely than not that our company will generate sufficient taxable income in the future to fully utilize all other deferred tax assets.
Liabilities related to uncertain tax positions, inclusive of interest and penalties, were $21.9 million and $22.3 million at December 31, 2010 and 2009, respectively, and are reported in “Other Noncurrent Liabilities” as provided in Note 13. These liabilities at December 31, 2010 and 2009 were reduced by $12.3 million and $14.9 million, respectively, for offsetting benefits from the corresponding effects of potential transfer pricing adjustments, state income taxes and rate arbitrage related to foreign structure. These offsetting benefits are recorded in “Other Assets” as provided in Note 9. The resulting net liabilities of $8.7 million and $8.5 million at December 31, 2010 and 2009, respectively, if recognized and released, would favorably affect earnings.
During the years ended December 31, 2010, 2009 and 2008, we recognized interest and penalties of $0.9 million, $0.9 million and $3.8 million, respectively, as components of income tax expense (benefit) in connection with our liabilities related to uncertain tax positions.
The liabilities related to uncertain tax positions, exclusive of interest, were $20.9 million and $23.4 million at December 31, 2010 and 2009, respectively. The following is a reconciliation of our total gross liability related to uncertain tax positions for 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Balance at January 1 |
$ | 23,416 | $ | 77,548 | $ | 100,999 | ||||||
| Additions for tax positions related to prior years |
— | 5,082 | 16,399 | |||||||||
| Reductions for tax positions related to prior years |
150 | (48,054 | ) | (31,924 | ) | |||||||
| Additions for tax positions related to current year |
463 | 1,495 | 12,085 | |||||||||
| Settlements |
— | (12,627 | ) | (4,417 | ) | |||||||
| Lapses in statutes of limitations |
(3,080 | ) | (28 | ) | (15,594 | ) | ||||||
| Balance at December 31 |
$ | 20,949 | $ | 23,416 | $ | 77,548 | ||||||
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2008 since the IRS has completed a review of our income tax returns through 2007, or for any U.S. state income tax audit prior to 2001.
With respect to jurisdictions outside the U.S., we are no longer subject to income tax audits for years before 2002. During 2010, we completed a tax audit for one of our Belgian companies for the 2007 tax year. During 2009, we completed tax audits in the following tax jurisdictions and respective tax years: Belgium, 2007 through 2008 for one entity, and Germany, 2002 through 2005. No significant tax was assessed for these audits. We were informed in February 2011 that the Belgian tax authorities would commence an audit of one of our Belgian companies for 2009.
While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
Since the timing of resolutions and/or closure of tax audits is uncertain, it is difficult to predict with certainty the range of reasonably possible significant increases or decreases in the liability related to uncertain tax positions that may occur within the next twelve months. Our current view is that it is reasonably possible that we could record a decrease in the liability related to uncertain tax positions, relating to a number of issues, up to approximately $0.8 million as a result of closure of tax statutes.
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NOTE 19—Special Items:
Special items included in the consolidated statements of income for the three years ended December 31, 2010 consist of the following (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Restructuring and other charges(a) |
$ | 6,958 | $ | 11,643 | $ | 25,789 | ||||||
| Port de Bouc facility disposition charges(b) |
— | 12,393 | 38,544 | |||||||||
| Total special items |
$ | 6,958 | $ | 24,036 | $ | 64,333 | ||||||
| (a) | The year ended December 31, 2008 included a charge amounting to $25.8 million ($16.8 million after income taxes) that relates to restructuring activities, principally reductions in force at various company locations across our operating segments. The year ended December 31, 2009 results included $11.6 million in pre-tax charges ($7.6 million after income taxes) for restructuring and other costs, related principally to planned reductions in force and the write-off of assets at our Arkansas facility. The year ended December 31, 2010 included charges amounting to $7.0 million ($4.6 million after income taxes) that related principally to planned reductions in force at our Bergheim, Germany site. |
| (b) | The year ended December 31, 2008 included a charge amounting to $38.5 million ($33.4 million after income taxes) that related to the divestiture of the Port de Bouc, France facility to International Chemical Investors Group S.A. effective December 31, 2008. The charge was principally due to the disposition of long-term assets of $22.6 million, net working capital of $4.4 million, restructuring charges of $5.2 million and other exit costs of $6.3 million. The charge and related assets and liabilities transferred were a part of our Polymer Solutions and Fine Chemistry business segments. The year ended December 31, 2009 included charges amounting to $12.4 million ($8.2 million after income taxes) that related to the costs of the final contract settlement arising from the disposition. |
The following table summarizes activity related to the workforce reduction charges outlined in notes (a) and (b) above (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
| Balance, beginning of year |
$ | 4,880 | $ | 20,276 | $ | 1,196 | ||||||
| Workforce reduction charges |
6,605 | 4,912 | 22,092 | |||||||||
| Payments |
(3,568 | ) | (19,932 | ) | (2,537 | ) | ||||||
| Amount reversed to income |
(370 | ) | (365 | ) | (597 | ) | ||||||
| Foreign currency translation |
(473 | ) | (11 | ) | 122 | |||||||
| Balance, end of year |
7,074 | 4,880 | 20,276 | |||||||||
| Less amounts reported in Accrued expenses |
3,845 | 4,880 | 20,276 | |||||||||
| Amounts reported in Other noncurrent liabilities |
$ | 3,229 | $ | — | $ | — | ||||||
The year ended December 31, 2010 included a charge of $6.6 million related to planned reductions in force at our Bergheim, Germany site, which is allocated between accrued expenses and other noncurrent liabilities in our consolidated financial statements based on timing of expected payout of the related obligations. Payments under this restructuring plan are expected to occur through 2014.
The year ended December 31, 2009 included a charge of $4.9 million related to planned reductions in force at various company locations, which is recorded in accrued expenses in our consolidated financial statements. The majority of the payments under this restructuring plan were paid out in 2010.
The year ended December 31, 2008 included a charge of $22.1 million related to the layoff of over 200 employees at various company locations, which is recorded in accrued expenses in our consolidated financial statements. The majority of the payments under this restructuring plan were paid out in 2009.
The year ended December 31, 2008 included approximately $2.6 million in remaining payments associated with a charge recorded in 2006 related to the divestiture of our Thann, France facility. During 2010 and 2009 there were no additional exit cost activities associated with this divestiture.
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NOTE 20—Fair Value of Financial Instruments:
In assessing the fair value of financial instruments, we use methods and assumptions that are based on market conditions and other risk factors existing at the time of assessment. Fair value information for our financial instruments is as follows:
Cash and Cash Equivalents, Accounts and Other Receivables and Accounts Payable—The carrying value approximates fair value due to their short-term nature.
Long-Term Debt—The carrying value of long-term debt reported in the accompanying consolidated balance sheets at December 31, 2010 and 2009, with the exceptions of the 4.5% and 5.1% senior notes and the JBC foreign currency denominated debt, approximates fair value as substantially all of the long-term debt bears interest based on prevailing variable market rates currently available in the countries in which we have borrowings. See Note 12, “Long-Term Debt.”
| Year Ended December 31 | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Recorded Amount |
Fair Value | Recorded Amount |
Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| Long-term debt |
$ | 860,910 | $ | 879,511 | $ | 812,713 | $ | 819,044 | ||||||||
Foreign Currency Forward Contracts—The fair values of our forward currency foreign contracts are estimated based on current settlement values. At December 31, 2010, $0.5 million was included in other accounts receivable and $5.4 million was included in accrued expenses related to our foreign currency forward contracts, and at December 31, 2009, $0.3 million was included in other accounts receivable related to our foreign currency forward contracts. For the years ended December 31, 2010, 2009 and 2008 we recognized (losses) gains of $(6.5) million, $0.6 million, and $2.0 million, respectively, in other income (expenses) related to the change in the fair value of our foreign currency forward contracts. A loss of $5.2 million for the year ended December 31, 2010 is included in “Other, net” within net cash provided by operating activities in the statements of cash flows. Such amounts were not material for the years ended December 31, 2009 and 2008. The amounts referenced above relate to forward contracts executed in connection with our financial risk management strategy whereby we hedge monetary exposures to minimize the financial impact of transaction risk.
NOTE 21—Fair Value Measurement:
In September 2006, authoritative guidance established a common definition for fair value to be applied to U.S. GAAP requiring use of fair value and also established a framework for measuring fair value, while expanding disclosure about such fair value measurements. This guidance applied to other accounting pronouncements that required or permitted fair value measurements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the effective date of this guidance was delayed for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statement on a recurring basis, to fiscal years beginning after November 15, 2008. The adoption of the deferred portion on January 1, 2009 did not have a material impact on our consolidated financial statements. On January 1, 2008, we adopted the portion of the guidance that was not delayed, and since our existing fair value measurements are consistent with the guidance of the statement, the partial adoption of the statement did not have a material impact on our consolidated financial statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities | |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or | |
| Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or | ||
| Inputs other than quoted prices that are observable for the asset or liability | ||
| Level 3 | Unobservable inputs for the asset or liability | |
We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010 and 2009 (in thousands):
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| December 31, 2010 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Quoted Prices in Active Markets for Similar Items (Level 2) |
Unobservable inputs (Level 3) |
|||||||||||||
| Assets: |
||||||||||||||||
| Investments under executive deferred compensation plan (a) |
$ | 17,763 | $ | 17,763 | $ | — | $ | — | ||||||||
| Equity securities (b) |
$ | 29 | $ | 29 | $ | — | $ | — | ||||||||
| Foreign currency forward contracts (c) |
$ | 540 | $ | — | $ | 540 | $ | — | ||||||||
| Pension assets (d) |
$ | 507,064 | $ | 216,105 | $ | 221,560 | $ | 69,399 | ||||||||
| Postretirement assets (d) |
$ | 7,985 | $ | — | $ | 7,985 | $ | — | ||||||||
| Liabilities: |
||||||||||||||||
| Obligations under executive deferred compensation plan (a) |
$ | 17,763 | $ | 17,763 | $ | — | $ | — | ||||||||
| Foreign currency forward contracts (c) |
$ | 5,413 | $ | — | $ | 5,413 | $ | — | ||||||||
| December 31, 2009 |
Quoted Prices in Active Markets for Identical Items (Level 1) |
Quoted Prices in Active Markets for Similar Items (Level 2) |
Unobservable inputs (Level 3) |
|||||||||||||
| Assets: |
||||||||||||||||
| Investments under executive deferred compensation plan (a) |
$ | 16,884 | $ | 16,884 | $ | — | $ | — | ||||||||
| Equity securities (b) |
$ | 26 | $ | 26 | $ | — | $ | — | ||||||||
| Foreign currency forward contracts (c) |
$ | 342 | $ | — | $ | 342 | $ | — | ||||||||
| Pension assets (d), (e) |
$ | 417,125 | $ | 204,963 | $ | 146,260 | $ | 65,902 | ||||||||
| Postretirement assets (d) |
$ | 8,207 | $ | — | $ | 8,207 | $ | — | ||||||||
| Liabilities: |
||||||||||||||||
| Obligations under executive deferred compensation plan (a) |
$ | 16,884 | $ | 16,884 | $ | — | $ | — | ||||||||
| (a) | We maintain an Executive Deferred Compensation Plan, or the Plan, that was adopted in 2001 and subsequently amended. The purpose of the Plan is to provide current tax planning opportunities as well as supplemental funds upon the retirement or death of certain of our employees. The Plan is intended to aid in attracting and retaining employees of exceptional ability by providing them with these benefits. We also maintain a Benefit Protection Trust, or the Trust, that was credited to provide a source of funds to assist in meeting the obligations of the Plan, subject to the claims of our creditors in the event of our insolvency. Assets of the Trust are consolidated in accordance with authoritative guidance. The assets of the Trust consist primarily of mutual fund investments (which are accounted for as trading securities and are marked-to-market on a monthly basis through the consolidated statements of income) and cash and cash equivalents. As such, these assets and obligations are classified within Level 1. |
| (b) | Our investments in equity securities are classified as available-for-sale and are recorded as “Investments” in the consolidated balance sheets. The changes in fair value are included in “Accumulated other comprehensive income” in equity. The securities are classified within Level 1. |
| (c) | As a result of our global operating and financing activities, we are exposed to market risks from changes in interest and foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from interest and foreign currency exchange rate fluctuations through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes and we do not use leveraged derivative financial instruments. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within Level 2. |
| (d) | See Note 17 “Pension Plans and Other Postretirement Benefits” for further discussion on fair value measurements of our pension and postretirement assets. |
| (e) | During 2010, we made an adjustment to previously reported amounts to properly classify certain assets in our international equity funds between Level 1 and Level 2. This adjustment, individually or in the aggregate, did not have a material impact on the reported financial statements for the year ended December 31, 2009. Additionally, had this adjustment been recorded in the prior periods to which it relates, the impact would not have affected total assets, net income attributable to Albemarle Corporation, or earnings per share. |
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NOTE 22—Acquisitions:
In the third quarter of 2010, we purchased certain property and equipment in Yeosu, South Korea in connection with our plans for building a metallocene polyolefin catalyst and TMG manufacturing site. The total purchase price of the initial property and equipment acquired was approximately $10.2 million, of which $8.0 million was paid in 2010, with the remainder expected to be paid by first quarter of 2011.
In the fourth quarter of 2010, we finalized certain agreements in connection with our new 50% owned joint venture Saudi Organometallic Chemicals Company (SOCC). We also made approximately $1.3 million in initial capital contributions in this investment during the fourth quarter of 2010.
On December 5, 2008, we reached agreement with Weifang Sinobrom Import and Export Company, Ltd., or Sinobrom, to form Sinobrom Albemarle Bromine Chemicals (Shandong) Company Ltd., which combined the existing business of Sinobrom, a leading marketer of bromine derivatives in China, with our global bromine expertise across the world. We paid approximately $3.8 million for our 75% interest in this joint venture.
On July 31, 2008, we acquired Sorbent Technologies Corporation, a full-service power plant mercury-control provider, for approximately $22.4 million. Goodwill and other intangible assets associated with the above items aggregate to approximately $23.0 million and $17.0 million, respectively, with weighted average amortizable lives associated with the other intangibles of approximately 20 years. Goodwill reported on these transactions is not deductible for tax purposes.
On June 30, 2008, we acquired the remaining 25% interests in our two antioxidant joint ventures in China (Ningbo Jinhai Albemarle Chemical and Industry Company Limited and Shanghai Jinhai Albemarle Fine Chemicals Company Limited) for approximately $19.9 million, resulting in 100% ownership interest in each of these Polymer Solutions segment joint ventures.
NOTE 23—Operating Segments and Geographic Area Information:
We have identified three reportable segments as required by authoritative accounting guidance. Our Polymer Solutions segment is comprised of the flame retardants and stabilizers and curatives product areas. Our Catalysts segment is comprised of the refinery catalysts and polyolefin catalysts product areas. Our Fine Chemistry segment is comprised of the performance chemicals and fine chemistry services and intermediates product areas. Segment data includes intersegment transfers of raw materials at cost, adjustments for special items, allocations for certain corporate costs, equity in net income of unconsolidated investments and net (income) loss attributable to noncontrolling interests.
Summarized financial information concerning our reportable segments is shown in the following tables. The “Corporate & Other” segment includes corporate-related items not allocated to the reportable segments.
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| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Net sales: |
||||||||||||
| Polymer Solutions |
$ | 903,745 | $ | 697,206 | $ | 915,515 | ||||||
| Catalysts |
890,007 | 808,063 | 923,763 | |||||||||
| Fine Chemistry |
569,012 | 500,125 | 627,837 | |||||||||
| Total net sales |
$ | 2,362,764 | $ | 2,005,394 | $ | 2,467,115 | ||||||
| Segment operating profit: |
||||||||||||
| Polymer Solutions |
$ | 195,681 | $ | 63,780 | $ | 92,600 | ||||||
| Catalysts |
219,125 | 129,691 | 142,715 | |||||||||
| Fine Chemistry |
79,505 | 52,589 | 99,895 | |||||||||
| Subtotal |
494,311 | 246,060 | 335,210 | |||||||||
| Equity in net income of unconsolidated investments: |
||||||||||||
| Polymer Solutions |
8,734 | 3,496 | 3,446 | |||||||||
| Catalysts |
29,648 | 18,934 | 19,881 | |||||||||
| Fine Chemistry |
— | — | — | |||||||||
| Corporate & Other |
(407 | ) | (108 | ) | (201 | ) | ||||||
| Total equity in net income of unconsolidated investments |
37,975 | 22,322 | 23,126 | |||||||||
| Net income attributable to noncontrolling interests: |
||||||||||||
| Polymer Solutions |
(6,154 | ) | (5,886 | ) | (7,223 | ) | ||||||
| Catalysts |
— | — | — | |||||||||
| Fine Chemistry |
(7,357 | ) | (5,471 | ) | (11,422 | ) | ||||||
| Corporate & Other |
(128 | ) | 102 | (161 | ) | |||||||
| Total net income attributable to noncontrolling interests |
(13,639 | ) | (11,255 | ) | (18,806 | ) | ||||||
| Segment income: |
||||||||||||
| Polymer Solutions |
198,261 | 61,390 | 88,823 | |||||||||
| Catalysts |
248,773 | 148,625 | 162,596 | |||||||||
| Fine Chemistry |
72,148 | 47,118 | 88,473 | |||||||||
| Total segment income |
519,182 | 257,133 | 339,892 | |||||||||
| Corporate & Other |
(73,040 | ) | (35,750 | ) | (50,322 | ) | ||||||
| Restructuring and other charges |
(6,958 | ) | (11,643 | ) | (25,789 | ) | ||||||
| Port de Bouc facility disposition charges |
— | (12,393 | ) | (38,544 | ) | |||||||
| Interest and financing expenses |
(25,533 | ) | (24,584 | ) | (38,175 | ) | ||||||
| Other income (expenses), net |
2,788 | (1,423 | ) | 601 | ||||||||
| Income tax (expense) benefit |
(92,719 | ) | 7,028 | 6,539 | ||||||||
| Net income attributable to Albemarle Corporation |
$ | 323,720 | $ | 178,368 | $ | 194,202 | ||||||
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| As of December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Identifiable assets: |
||||||||||||
| Polymer Solutions |
$ | 700,800 | $ | 667,133 | $ | 702,580 | ||||||
| Catalysts |
1,204,586 | 1,184,841 | 1,259,570 | |||||||||
| Fine Chemistry |
424,527 | 413,614 | 463,224 | |||||||||
| Corporate & Other |
738,168 | 505,969 | 447,343 | |||||||||
| Total identifiable assets |
$ | 3,068,081 | $ | 2,771,557 | $ | 2,872,717 | ||||||
| Goodwill: |
||||||||||||
| Polymer Solutions |
$ | 36,210 | $ | 36,153 | $ | 34,539 | ||||||
| Catalysts |
211,423 | 228,166 | 221,868 | |||||||||
| Fine Chemistry |
24,605 | 28,402 | 22,360 | |||||||||
| Total goodwill |
$ | 272,238 | $ | 292,721 | $ | 278,767 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Depreciation and amortization: |
||||||||||||
| Polymer Solutions |
$ | 30,854 | $ | 34,481 | $ | 42,759 | ||||||
| Catalysts |
42,396 | 42,508 | 43,087 | |||||||||
| Fine Chemistry |
21,570 | 22,751 | 25,075 | |||||||||
| Corporate & Other |
758 | 773 | 764 | |||||||||
| Total depreciation and amortization |
$ | 95,578 | $ | 100,513 | $ | 111,685 | ||||||
| Capital expenditures: |
||||||||||||
| Polymer Solutions |
$ | 18,413 | $ | 24,209 | $ | 44,241 | ||||||
| Catalysts |
38,967 | 39,872 | 33,697 | |||||||||
| Fine Chemistry |
17,193 | 33,621 | 20,843 | |||||||||
| Corporate & Other |
905 | 3,084 | 955 | |||||||||
| Total capital expenditures |
$ | 75,478 | $ | 100,786 | $ | 99,736 | ||||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Net Sales:(a) |
||||||||||||
| United States |
$ | 863,297 | $ | 801,201 | $ | 922,488 | ||||||
| Foreign |
1,499,467 | 1,204,193 | 1,544,627 | |||||||||
| Total |
$ | 2,362,764 | $ | 2,005,394 | $ | 2,467,115 | ||||||
| (a) | No sales in a foreign country exceed 10% of total net sales. Also, net sales are attributed to countries based upon shipments to final destination. |
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| As of December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Long-Lived Assets: |
||||||||||||
| United States |
$ | 582,763 | $ | 569,873 | $ | 551,514 | ||||||
| Netherlands |
186,960 | 213,925 | 211,864 | |||||||||
| Jordan |
107,148 | 109,379 | 111,687 | |||||||||
| Brazil |
75,816 | 60,743 | 41,676 | |||||||||
| Germany |
67,579 | 70,128 | 76,168 | |||||||||
| China |
63,672 | 61,431 | 57,027 | |||||||||
| France |
25,075 | 21,851 | 19,124 | |||||||||
| United Kingdom |
13,530 | 16,935 | 18,048 | |||||||||
| Other foreign countries |
45,280 | 30,145 | 32,588 | |||||||||
| Total |
$ | 1,167,823 | $ | 1,154,410 | $ | 1,119,696 | ||||||
Net sales to external customers in each of the segments consists of the following:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Polymer Solutions: |
||||||||||||
| Flame Retardants |
$ | 688,801 | $ | 489,484 | $ | 649,947 | ||||||
| Stabilizers and Curatives |
214,944 | 207,722 | 265,568 | |||||||||
| Total Polymer Solutions |
$ | 903,745 | $ | 697,206 | $ | 915,515 | ||||||
| Catalysts: |
||||||||||||
| Polyolefin Catalysts |
$ | 221,416 | $ | 181,406 | $ | 194,645 | ||||||
| Refinery Catalysts |
668,591 | 626,657 | 729,118 | |||||||||
| Total Catalysts |
$ | 890,007 | $ | 808,063 | $ | 923,763 | ||||||
| Fine Chemistry: |
||||||||||||
| Performance Chemicals |
$ | 361,044 | $ | 294,823 | $ | 396,482 | ||||||
| Fine Chemistry Services and Intermediates Business |
207,968 | 205,302 | 231,355 | |||||||||
| Total Fine Chemistry |
$ | 569,012 | $ | 500,125 | $ | 627,837 | ||||||
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NOTE 24—Quarterly Financial Summary (Unaudited):
| First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
| 2010 |
||||||||||||||||
| Net sales |
$ | 580,270 | $ | 592,483 | $ | 585,036 | $ | 604,975 | ||||||||
| Gross profit |
$ | 164,471 | $ | 188,167 | $ | 196,823 | $ | 196,461 | ||||||||
| Restructuring and other charges(a) |
$ | 6,958 | $ | — | $ | — | $ | — | ||||||||
| Net income attributable to Albemarle Corporation |
$ | 63,308 | $ | 81,751 | $ | 93,689 | $ | 84,972 | ||||||||
| Basic earnings per share |
$ | 0.69 | $ | 0.90 | $ | 1.03 | $ | 0.93 | ||||||||
| Shares used to compute basic earnings per share |
91,386 | 91,308 | 91,312 | 91,567 | ||||||||||||
| Diluted earnings per share |
$ | 0.69 | $ | 0.89 | $ | 1.02 | $ | 0.92 | ||||||||
| Shares used to compute diluted earnings per share |
92,193 | 92,111 | 92,082 | 92,350 | ||||||||||||
| 2009 |
||||||||||||||||
| Net sales |
$ | 486,591 | $ | 445,299 | $ | 515,276 | $ | 558,228 | ||||||||
| Gross profit |
$ | 90,506 | $ | 109,818 | $ | 134,079 | $ | 149,459 | ||||||||
| Port de Bouc facility disposition charges(b) |
$ | — | $ | 12,393 | $ | — | $ | — | ||||||||
| Restructuring and other charges(a) |
$ | — | $ | — | $ | — | $ | 11,643 | ||||||||
| Net income attributable to Albemarle Corporation (c) |
$ | 25,399 | $ | 38,493 | $ | 52,131 | $ | 62,345 | ||||||||
| Basic earnings per share(d) |
$ | 0.28 | $ | 0.42 | $ | 0.57 | $ | 0.68 | ||||||||
| Shares used to compute basic earnings per share(d) |
91,380 | 91,474 | 91,588 | 91,605 | ||||||||||||
| Diluted earnings per share(d) |
$ | 0.28 | $ | 0.42 | $ | 0.57 | $ | 0.68 | ||||||||
| Shares used to compute diluted earnings per share(d) |
91,747 | 92,011 | 92,174 | 92,316 | ||||||||||||
| (a) | First quarter of 2010 results include $7.0 million in pre-tax charges ($4.6 million after income taxes) that related principally to planned reductions in force at our Bergheim, Germany site. Fourth quarter 2009 results included $11.6 million in pre-tax charges ($7.6 million after income taxes) for restructuring and other costs, related principally to planned reductions in force and to the write-off of assets at our Arkansas facility. |
| (b) | The second quarter of 2009 included charges amounting to $12.4 million ($8.2 million after income taxes) that related to the costs of the final contract settlement arising from the divestiture of our Port de Bouc, France facility to International Chemical Investors Group S.A. effective December 31, 2008. |
| (c) | The fourth quarter of 2009 included $11.3 million of tax benefits due mainly from the final settlement of the 2005-2007 tax audits with the U.S. IRS. The second quarter of 2009 included a $9.2 million benefit due mainly to a tax issue resolution for the years 2005 through 2007 with the U.S. IRS and a $4.2 million benefit associated with the Port de Bouc charge described in footnote (b). The first quarter of 2009 included a net benefit of $2.5 million resulting from adjustments related to prior periods. |
| (d) | On January 1, 2009, we adopted new accounting guidance associated with share-based payment transactions considered to be participating securities. This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends, such as certain of our restricted stock awards, are participating securities and therefore shall be included in the earnings per share calculation pursuant to the two class method. Refer to Note 3 “Earnings Per Share” for additional information. |
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
NONE
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure 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 our principal financial officer concluded that, as of end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Design and Evaluation of Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria for effective internal control over financial reporting described in the “Internal Control-Integrated Framework” set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment, management concluded that, as of December 31, 2010, our internal control over financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein. Management’s report and the independent registered public accounting firm’s attestation report are included in Item 8 under the captions entitled “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended December 31, 2010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information. |
NONE
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this Item 10 is contained in the Proxy Statement and is incorporated herein by reference. In addition, the information in “Executive Officers of the Registrant” appearing after Item 4 Part I of this Annual Report, is incorporated herein.
Code of Business Conduct
We have adopted a code of business conduct and ethics for directors, officers and employees, known as the Albemarle Code of Business Conduct. The Code of Business Conduct is available on our website at http://www.albemarle.com. Shareholders may also request a free copy of the Code of Business Conduct from: Albemarle Corporation, Attention: Investor Relations, 451 Florida Street, Baton Rouge, Louisiana 70801. We will disclose any amendments to, or waivers from, a provision of our Code of Business Conduct that applies to the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions that relates to any element of the Code of Business Conduct as defined in Item 406 of Regulation S-K by posting such information on our website.
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New York Stock Exchange Certifications
Because our common stock is listed on the New York Stock Exchange, or NYSE, our Chief Executive Officer is required to make, and he has made, an annual certification to the NYSE stating that he was not aware of any violation by us of the corporate governance listing standards of the NYSE. Our Chief Executive Officer made his annual certification to that effect to the NYSE as of May 10, 2010. In addition, we have filed, as exhibits to this Annual Report on Form 10-K, the certifications of our principal executive officer and principal financial officer required under Sections 906 and 302 of the Sarbanes Oxley Act of 2002 to be filed with the Securities and Exchange Commission regarding the quality of our public disclosure.
Additional information is contained in the Proxy Statement and is incorporated herein by reference.
| Item 11. | Executive Compensation. |
The information required by this Item 11 is contained in the Proxy Statement and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Item 12 is contained in the Proxy Statement and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item 13 is contained in the Proxy Statement and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services. |
The information required by this Item 14 is contained in the Proxy Statement and is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) The following consolidated financial and informational statements of the registrant are included in Part II Item 8 on pages 47 to 90:
| Management’s Report on Internal Control Over Financial Reporting |
||||
| Report of Independent Registered Public Accounting Firm | ||||
| Consolidated Balance Sheets as of December 31, 2010 and 2009 | ||||
| Consolidated Statements of Income, Changes in Equity and Cash Flows for the years ended December 31, 2010, 2009 and 2008 | ||||
| Notes to the Consolidated Financial Statements | ||||
(a)(2) No Financial Statement Schedules are provided in accordance with Item 15(a)(2) as the information is either not applicable, not required or has been furnished in the Consolidated Financial Statements or Notes thereto.
| (a)(3) |
Exhibits | |
| The following documents are filed as exhibits to this Form 10-K pursuant to Item 601 of Regulation S-K: | ||
| 3.1 — |
Amended and Restated Articles of Incorporation (including Amendment thereto) [filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-3 (Registration No. 333-119723) and incorporated herein by reference]. | |
| 3.2 — |
Amended and Restated Bylaws of the registrant effective as of January 1, 2011 [filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 20, 2010, and incorporated herein by reference]. | |
| 4.1 — |
Indenture, dated as of January 20, 2005, between the Company and The Bank of New York, as trustee [filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on January 20, 2005, and incorporated herein by reference]. | |
| 4.2 — |
First Supplemental Indenture, dated as of January 20, 2005, between the Company and The Bank of New York, as trustee [filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on January 20, 2005, and incorporated herein by reference]. | |
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| 4.3 — |
Form of Global Security for the 5.10% Senior Notes due 2015 (included as Exhibit A to Exhibit 4.2 hereto). | |
| 4.4 — |
Second Supplemental Indenture, dated as of December 10, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee [filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 10, 2010, and incorporated herein by reference]. | |
| 4.5 — |
Form of Global Security for the 4.50% Senior Notes due 2020 [filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 10, 2010, and incorporated herein by reference]. | |
| 10.1 — |
Credit Agreement, dated as of March 23, 2007, among Albemarle Corporation, Albemarle Europe SPRL and Albemarle Netherlands BV, as borrowers, and certain of the Company’s subsidiaries that from time to time become parties thereto, as guarantors, the several banks and other financial institutions as may from time to time become parties thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on March 29, 2007, and incorporated herein by reference]. | |
| *10.2 — |
First Amendment to Credit Agreement, dated as of July 25, 2007, among Albemarle Corporation, Albemarle Europe SPRL, Albemarle Netherlands BV, Albemarle Global Finance Company SA, certain of the Company’s subsidiaries that from time to time become parties thereto, as guarantors, the several banks and other financial institutions as may from time to time become parties thereto, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. | |
| 10.3 — |
Albemarle Corporation 1994 Omnibus Stock Incentive Plan, adopted on February 8, 1994 [filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (No. 33-77452), and incorporated herein by reference]. | |
| 10.4 — |
Amendment to the Albemarle Corporation 1994 Omnibus Stock Incentive Plan, adopted December 30, 2002 [filed as Exhibit 10.2.1 to the Company’s Form 10-K for the year ended December 31, 2002 (No. 1-12658), and incorporated herein by reference]. | |
| 10.5 — |
Albemarle Corporation 1998 Incentive Plan, adopted April 22, 1998, and amended effective January 1, 2003 [filed as Exhibit 10.8 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 (No. 1-12658), and incorporated herein by reference]. | |
| 10.6 — |
Amendment to the Albemarle Corporation 1998 Omnibus Stock Incentive Plan, adopted as of October 1, 2003 [filed as Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (No. 1-12658), and incorporated herein by reference]. | |
| 10.7 — |
Compensation Arrangement with Mark C. Rohr, dated February 26, 1999 [filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999 (No. 1-12658), and incorporated herein by reference]. | |
| 10.8 — |
Amendment to Compensation Arrangement with Mark C. Rohr, dated March 4, 2005 [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on March 8, 2005, and incorporated herein by reference]. | |
| 10.9 — |
Restricted Stock Award Agreement for Mark C. Rohr [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on February 12, 2008, and incorporated herein by reference]. | |
| 10.10 — |
Compensation Arrangement with Luther C. Kissam, IV, dated August 29, 2003 [filed as Exhibit 10.10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (No. 1-12658), and incorporated herein by reference]. | |
| 10.11 — |
Albemarle Corporation 2003 Incentive Plan, adopted January 31, 2003 and approved by the shareholders on March 26, 2003 [filed as Annex A to the Company’s Definitive Proxy Statement on 14A (No. 1-12658) filed on February 26, 2003 and incorporated herein by reference]. | |
| 10.12 — |
First Amendment to the Albemarle Corporation 2003 Incentive Plan, dated as of December 13, 2006 [filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.13 — |
Albemarle Corporation Directors’ Deferred Compensation Plan, approved by shareholders on April 24, 1996 [filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (No. 1-12658), and incorporated herein by reference]. | |
| 10.14 — |
First Amendment to the Albemarle Corporation Directors’ Deferred Compensation Plan, dated as of December 13, 2006 [filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
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| 10.15 — |
First Amendment to the Albemarle Corporation Directors’ Deferred Compensation Plan, dated as of May 13, 2009 [filed as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (No. 1-12658), and incorporated herein by reference]. | |
| 10.16 — |
2008 Named Executive Officer Salary Information [filed as Item 5.02 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 17, 2007, and incorporated herein by reference]. | |
| *10.17 — |
Summary of Directors’ Compensation. | |
| 10.18 — |
Form of Stock Option Agreement [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (No. 1-12658), filed March 18, 2010, and incorporated herein by reference]. | |
| 10.19 — |
Form of Amendment to Outstanding Stock Option Agreements [filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.20 — |
Form of Restricted Stock Agreement [filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K (No. 1-12658), filed March 18, 2010, and incorporated herein by reference]. | |
| 10.21 — |
Form of Performance Stock Unit Agreement [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658), filed March 18, 2010, and incorporated herein by reference]. | |
| 10.22 — |
Notice of Performance Unit Award [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K/A (No. 1-12658) filed on February 13, 2008, and incorporated herein by reference]. | |
| 10.23 — |
Notice of Restricted Stock Unit Award [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on April 3, 2009, and incorporated herein by reference]. | |
| 10.24 — |
Notice of Option Grant [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on April 3, 2009, and incorporated herein by reference]. | |
| 10.25 — |
Form of Amendment to Outstanding Performance Unit Agreements [filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.26 — |
Compensation Arrangement with Richard J. Diemer, Jr., dated as of July 26, 2005 [filed as Exhibit 10.16 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on August 2, 2005, and incorporated herein by reference]. | |
| 10.27 — |
Amended and Restated Albemarle Corporation Supplemental Executive Retirement Plan, effective as of January 1, 2005 [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 14, 2005, and incorporated herein by reference]. | |
| 10.28 — |
Second Amendment to the Albemarle Corporation Supplemental Executive Retirement Plan, dated as of December 13, 2006 [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.29 — |
Amended and Restated Albemarle Corporation Executive Deferred Compensation Plan, effective as of January 1, 2005 [filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 14, 2005, and incorporated herein by reference]. | |
| 10.30 — |
First Amendment to the Albemarle Corporation Executive Deferred Compensation Plan, dated as of December 13, 2006 [filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.31 — |
2006 Stock Compensation Plan for Non-Employee Directors of Albemarle Corporation [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on April 20, 2006, and incorporated herein by reference]. | |
| 10.32 — |
Share Purchase Agreement, among Albemarle Corporation, Albemarle Overseas Development Corporation and International Chemical Investors, SA, dated August 31, 2006 [filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 (No. 1-12658), and incorporated herein by reference]. | |
| 10.33 — |
Form of Severance Compensation Agreement [filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on October 1, 2008, and incorporated herein by reference]. | |
| 10.34 — |
Albemarle Corporation Severance Pay Plan, as revised effective as of December 13, 2006 [filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
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| 10.35 — |
Amended and Restated Albemarle Corporation Benefits Protection Trust, effective as of December 13, 2006 [filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K (No. 1-12658) filed on December 18, 2006, and incorporated herein by reference]. | |
| 10.36 — |
Albemarle Corporation 2008 Incentive Plan [filed as Annex A to the Company’s definitive Proxy Statement (No. 1-12658) filed on March 12, 2008, and incorporated herein by reference]. | |
| 10.37 — |
First Amendment to the Albemarle Corporation 2008 Incentive Plan [filed as Appendix A to the Company’s definitive Proxy Statement (No. 1-12658) filed on March 31, 2009, and incorporated herein by reference]. | |
| 10.38 — |
2008 Stock Compensation Plan for Non-Employee Directors of Albemarle Corporation [filed as Annex B to the Company’s definitive Proxy Statement (No. 1-12658) filed on March 12, 2008, and incorporated herein by reference]. | |
| 10.39 — |
Albemarle Corporation Employee Relocation Policy [filed as Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (No. 1-12658) filed on August 7, 2008, and incorporated herein by reference]. | |
| 10.40 — |
Albemarle Corporation 2008 Incentive Plan, as amended and restated as of April 20, 2010 [filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (No. 333-166828) filed on May 14, 2010, and incorporated herein by reference]. | |
| 10.41 — |
Second Amendment to the Albemarle Corporation 2008 Incentive Plan [filed as Appendix A to the Definitive Proxy Statement on Schedule 14A filed with the Commission on March 9, 2010 and incorporated herein by reference]. | |
| 10.42 — |
First Amendment to the Albemarle Corporation 2008 Stock Compensation Plan for Non-Employee Directors [filed as Appendix B to the Definitive Proxy Statement on Schedule 14A filed with the Commission on March 9, 2010 and incorporated herein by reference]. | |
| *12.1 — |
Statement of Computation of Ratio of Earnings to Fixed Charges. | |
| *21.1 — |
Significant Subsidiaries of the Company. | |
| *23.1 — |
Consent of PricewaterhouseCoopers LLP. | |
| *31.1 — |
Certification of Chief Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act, as amended. | |
| *31.2 — |
Certification of Chief Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act, as amended. | |
| *32.1 — |
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| *32.2 — |
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| *99.1 — |
Five-Year Summary. | |
| *101 — |
Interactive Data File (Annual Report on Form 10-K, for the fiscal year ended December 31, 2010, furnished in XBRL (eXtensible Business Reporting Language))
Attached as Exhibit 101 to this report are the following documents formatted in XBRL: (i) the Consolidated Statements of Income for the fiscal years ended December 31, 2010, 2009 and 2008, (ii) the Consolidated Balance Sheets at December 31, 2010 and 2009, (iii) the Consolidated Statements of Changes in Equity for the fiscal years ended December 31, 2010, 2009 and 2008, (iv) the Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2010, 2009 and 2008 and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections. | |
| * | Included with this filing. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALBEMARLE CORPORATION (Registrant) | ||
| By: | /S/ MARK C. ROHR | |
| (Mark C. Rohr) | ||
| Chairman of the Board | ||
Dated: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 25, 2011.
| Signature |
Title | |
| /S/ MARK C. ROHR | Chairman of the Board and Chief Executive Officer (principal executive officer) | |
| (Mark C. Rohr) | ||
| /S/ SCOTT A. TOZIER | Senior Vice President, Chief Financial Officer (principal financial officer) | |
| (Scott A. Tozier) | ||
| /S/ WILLIAM B. ALLEN, JR. | Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) | |
| (William B. Allen, Jr.) | ||
| /S/ J. ALFRED BROADDUS, JR. | Director | |
| (J. Alfred Broaddus, Jr.) | ||
| /S/ WILLIAM H. HERNANDEZ | Director | |
| (William H. Hernandez) | ||
| /s/ R. WILLIAM IDE III | Director | |
| (R. William Ide III) | ||
| /S/ RICHARD L. MORRILL | Director | |
| (Richard L. Morrill) | ||
| /S/ JIM W. NOKES | Director | |
| (Jim W. Nokes) | ||
| /S/ BARRY W. PERRY | Director | |
| (Barry W. Perry) | ||
| /S/ JOHN SHERMAN, JR. | Director | |
| (John Sherman, Jr.) | ||
| /S/ CHARLES E. STEWART | Director | |
| (Charles E. Stewart) | ||
| /S/ HARRIETT TEE TAGGART | Director | |
| (Harriett Tee Taggart) | ||
| /S/ ANNE M. WHITTEMORE | Director | |
| (Anne M. Whittemore) | ||
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