06.30.2014 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_________________________
FORM 10-Q
_________________________
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2014
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 1-12658
_________________________ 
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
_________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  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 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 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, $.01 par value, outstanding as of July 25, 2014: 78,241,156


Table of Contents

ALBEMARLE CORPORATION
INDEX – FORM 10-Q
 
 
 
 
 
 
Page
Number(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8-23
 
 
 
24-41
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EXHIBITS
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited).
ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
604,721

 
$
576,842

 
$
1,204,564

 
$
1,163,439

Cost of goods sold
397,358

 
385,172

 
801,602

 
775,858

Gross profit
207,363

 
191,670

 
402,962

 
387,581

Selling, general and administrative expenses
67,011

 
61,725

 
145,115

 
125,300

Research and development expenses
21,937

 
21,565

 
44,509

 
41,518

Restructuring and other charges, net (Note 13)
8,175

 

 
25,175

 

Operating profit
110,240

 
108,380

 
188,163

 
220,763

Interest and financing expenses
(8,733
)
 
(7,608
)
 
(17,506
)
 
(12,839
)
Other (expenses) income, net
(979
)
 
(1,585
)
 
164

 
(5,779
)
Income from continuing operations before income taxes and equity in net income of unconsolidated investments
100,528

 
99,187

 
170,821

 
202,145

Income tax expense
21,773

 
20,396

 
34,963

 
45,934

Income from continuing operations before equity in net income of unconsolidated investments
78,755

 
78,791

 
135,858

 
156,211

Equity in net income of unconsolidated investments (net of tax)
10,649

 
9,709

 
19,550

 
19,970

Net income from continuing operations
89,404

 
88,500

 
155,408

 
176,181

(Loss) income from discontinued operations (net of tax)
(60,025
)
 
2,628

 
(61,794
)
 
4,463

Net income
29,379

 
91,128

 
93,614

 
180,644

Net income attributable to noncontrolling interests
(6,932
)
 
(8,389
)
 
(14,584
)
 
(13,918
)
Net income attributable to Albemarle Corporation
$
22,447

 
$
82,739

 
$
79,030

 
$
166,726

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
1.05

 
$
0.95

 
$
1.78

 
$
1.88

Discontinued operations
(0.76
)
 
0.03

 
(0.78
)
 
0.05

 
$
0.29

 
$
0.98

 
$
1.00

 
$
1.93

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
1.04

 
$
0.95

 
$
1.77

 
$
1.87

Discontinued operations
(0.76
)
 
0.03

 
(0.78
)
 
0.05

 
$
0.28

 
$
0.98

 
$
0.99

 
$
1.92

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
78,662

 
84,028

 
79,199

 
86,374

Weighted-average common shares outstanding – diluted
79,091

 
84,489

 
79,602

 
86,862

Cash dividends declared per share of common stock
$
0.275

 
$
0.240

 
$
0.550

 
$
0.480

See accompanying Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
29,379

 
$
91,128

 
$
93,614

 
$
180,644

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(804
)
 
5,241

 
(6,062
)
 
(28,668
)
Pension and postretirement benefits
(167
)
 
(330
)
 
(468
)
 
(404
)
Unrealized loss on interest rate swap
(6,410
)
 

 
(10,421
)
 

Other
37

 
29

 
72

 
61

Total other comprehensive (loss) income, net of tax
(7,344
)
 
4,940

 
(16,879
)
 
(29,011
)
Comprehensive income
22,035

 
96,068

 
76,735

 
151,633

Comprehensive income attributable to non-controlling interests
(6,871
)
 
(8,156
)
 
(14,306
)
 
(13,989
)
Comprehensive income attributable to Albemarle Corporation
$
15,164

 
$
87,912

 
$
62,429

 
$
137,644

See accompanying Notes to the Condensed Consolidated Financial Statements.

4

Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)

 
June 30,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
515,119

 
$
477,239

Trade accounts receivable, less allowance for doubtful accounts (2014 – $1,613; 2013 – $1,614)
407,298

 
446,864

Other accounts receivable
39,413

 
45,094

Inventories
370,564

 
436,049

Assets of discontinued operations held for sale
137,984

 

Other current assets
55,505

 
77,669

Total current assets
1,525,883

 
1,482,915

Property, plant and equipment, at cost
2,628,376

 
2,972,084

Less accumulated depreciation and amortization
1,388,790

 
1,615,015

Net property, plant and equipment
1,239,586

 
1,357,069

Investments
224,050

 
212,178

Other assets
156,363

 
160,229

Goodwill
265,231

 
284,203

Other intangibles, net of amortization
43,419

 
88,203

Total assets
$
3,454,532

 
$
3,584,797

Liabilities And Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
185,024

 
$
194,064

Accrued expenses
216,232

 
190,533

Current portion of long-term debt
377,521

 
24,554

Dividends payable
21,268

 
19,197

Liabilities of discontinued operations held for sale
11,178

 

Income taxes payable
4,691

 
8,015

Total current liabilities
815,914

 
436,363

Long-term debt
685,845

 
1,054,310

Postretirement benefits
52,909

 
53,903

Pension benefits
71,866

 
57,647

Other noncurrent liabilities
96,472

 
110,610

Deferred income taxes
106,436

 
129,188

Commitments and contingencies (Note 8)

 

Equity:
 
 
 
Albemarle Corporation shareholders’ equity:
 
 
 
Common stock, $.01 par value, issued and outstanding – 78,234 in 2014 and 80,053 in 2013
782

 
801

Additional paid-in capital
3,213

 
9,957

Accumulated other comprehensive income
99,644

 
116,245

Retained earnings
1,399,342

 
1,500,358

Total Albemarle Corporation shareholders’ equity
1,502,981

 
1,627,361

Noncontrolling interests
122,109

 
115,415

Total equity
1,625,090

 
1,742,776

Total liabilities and equity
$
3,454,532

 
$
3,584,797

See accompanying Notes to the Condensed Consolidated Financial Statements.

5

Table of Contents


ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 
(In Thousands, Except Share
 
 
 
 
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Albemarle
Shareholders’
Equity
 
Non-
controlling
Interests
 
Total
Equity
Common Stock
 
Data)
 
Shares
 
Amounts
 
 
 
 
 
 
Balance at January 1, 2014
 
80,052,842

 
$
801

 
$
9,957

 
$
116,245

 
$
1,500,358

 
$
1,627,361

 
$
115,415

 
$
1,742,776

Net income
 
 
 
 
 
 
 
 
 
79,030

 
79,030

 
14,584

 
93,614

Other comprehensive loss
 
 
 
 
 
 
 
(16,601
)
 
 
 
(16,601
)
 
(278
)
 
(16,879
)
Cash dividends declared
 
 
 
 
 
 
 
 
 
(43,387
)
 
(43,387
)
 
(7,612
)
 
(50,999
)
Stock-based compensation and other
 
 
 
 
 
6,606

 
 
 
 
 
6,606

 
 
 
6,606

Exercise of stock options
 
70,046

 
1

 
2,354

 
 
 
 
 
2,355

 
 
 
2,355

Shares repurchased
 
(1,967,069
)
 
(20
)
 
(13,321
)
 
 
 
(136,659
)
 
(150,000
)
 
 
 
(150,000
)
Tax benefit related to stock plans
 
 
 
 
 
767

 
 
 
 
 
767

 
 
 
767

Issuance of common stock, net
 
127,533

 
1

 
(1
)
 
 
 
 
 

 
 
 

Shares withheld for withholding taxes associated with common stock issuances
 
(49,322
)
 
(1
)
 
(3,149
)
 
 
 
 
 
(3,150
)
 
 
 
(3,150
)
Balance at June 30, 2014
 
78,234,030

 
$
782

 
$
3,213

 
$
99,644

 
$
1,399,342

 
$
1,502,981

 
$
122,109

 
$
1,625,090

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
 
88,899,209

 
$
889

 
$
2,761

 
$
85,264

 
$
1,744,684

 
$
1,833,598

 
$
98,410

 
$
1,932,008

Net income
 
 
 
 
 
 
 
 
 
166,726

 
166,726

 
13,918

 
180,644

Other comprehensive (loss) income
 
 
 
 
 
 
 
(29,082
)
 
 
 
(29,082
)
 
71

 
(29,011
)
Cash dividends declared
 
 
 
 
 
 
 
 
 
(40,753
)
 
(40,753
)
 

 
(40,753
)
Stock-based compensation and other
 
 
 
 
 
4,144

 
 
 
 
 
4,144

 
 
 
4,144

Exercise of stock options
 
132,238

 
1

 
3,916

 
 
 
 
 
3,917

 
 
 
3,917

Shares repurchased
 
(7,814,045
)
 
(78
)
 
(4,556
)
 
 
 
(577,664
)
 
(582,298
)
 
 
 
(582,298
)
Tax benefit related to stock plans
 
 
 
 
 
2,519

 
 
 
 
 
2,519

 
 
 
2,519

Issuance of common stock, net
 
238,939

 
3

 
(3
)
 
 
 
 
 

 
 
 

Shares withheld for withholding taxes associated with common stock issuances
 
(90,957
)
 
(1
)
 
(5,776
)
 
 
 
 
 
(5,777
)
 
 
 
(5,777
)
Balance at June 30, 2013
 
81,365,384

 
$
814

 
$
3,005

 
$
56,182

 
$
1,292,993

 
$
1,352,994

 
$
112,399

 
$
1,465,393

See accompanying Notes to the Condensed Consolidated Financial Statements.

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Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

 
Six Months Ended 
 June 30,
 
2014
 
2013
Cash and cash equivalents at beginning of year
$
477,239

 
$
477,696

Cash flows from operating activities:
 
 
 
Net income
93,614

 
180,644

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Depreciation and amortization
52,714

 
51,817

Write-offs associated with restructuring and other
6,333

 

Impairment of assets of discontinued operations
80,711

 

Stock-based compensation
7,319

 
4,529

Excess tax benefits realized from stock-based compensation arrangements
(767
)
 
(2,519
)
Equity in net income of unconsolidated investments (net of tax)
(19,550
)
 
(19,970
)
Dividends received from unconsolidated investments and nonmarketable securities
11,944

 
13,599

Pension and postretirement expense
17,917

 
3,152

Pension and postretirement contributions
(4,717
)
 
(4,246
)
Unrealized gain on investments in marketable securities
(703
)
 
(1,912
)
Deferred income taxes
(16,114
)
 
4,911

Working capital changes
63,235

 
(53,018
)
Other, net
3,211

 
1,867

Net cash provided by operating activities
295,147

 
178,854

Cash flows from investing activities:
 
 
 
Capital expenditures
(46,670
)
 
(103,168
)
Cash payments related to acquisitions and other

 
(250
)
Sales of marketable securities, net
642

 
768

Net cash used in investing activities
(46,028
)
 
(102,650
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(3,016
)
 
(6,380
)
Proceeds from borrowings of long-term debt

 
117,000

Other (repayments) borrowings, net
(13,083
)
 
266,248

Dividends paid to shareholders
(41,316
)
 
(39,049
)
Repurchases of common stock
(150,000
)
 
(582,298
)
Proceeds from exercise of stock options
2,355

 
3,917

Excess tax benefits realized from stock-based compensation arrangements
767

 
2,519

Withholding taxes paid on stock-based compensation award distributions
(3,150
)
 
(5,777
)
Debt financing costs
(1,372
)
 
(133
)
Net cash used in financing activities
(208,815
)
 
(243,953
)
Net effect of foreign exchange on cash and cash equivalents
(2,424
)
 
4,712

Increase (decrease) in cash and cash equivalents
37,880

 
(163,037
)
Cash and cash equivalents at end of period
$
515,119

 
$
314,659

See accompanying Notes to the Condensed Consolidated Financial Statements.

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Table of Contents
ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)


NOTE 1—Basis of Presentation:
In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Albemarle Corporation and our wholly-owned, majority-owned and controlled subsidiaries (collectively, “Albemarle,” “we,” “us,” “our” or “the Company”) contain all adjustments necessary for a fair statement, in all material respects, of our condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013, our consolidated statements of income and consolidated statements of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013 and our condensed consolidated statements of cash flows and consolidated statements of changes in equity for the six-month periods ended June 30, 2014 and 2013. All adjustments are of a normal and recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), which was filed with the Securities and Exchange Commission (SEC) on February 25, 2014. On May 30, 2014, we filed a Current Report on Form 8-K to update our 2013 Form 10-K for the segment change described in Note 9 “Operating Segments” included herein. The December 31, 2013 consolidated balance sheet data herein was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). The results of operations for the three-month and six-month period ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the accompanying consolidated financial statements and the notes thereto to conform to the current presentation.
On April 15, 2014, the Company signed a definitive agreement to sell its antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc. for an undisclosed amount of cash. In the second quarter of 2014, the Company began accounting for these assets as held for sale, and as such the financial results of the disposal group have been presented as discontinued operations in the consolidated statements of income and excluded from segment results for all periods presented. Long-lived assets and asset groups are classified as held for sale in the period in which the specific criteria are met in accordance with accounting standards for reporting discontinued operations. See Note 15, “Discontinued Operations” for additional information.

NOTE 2—Foreign Exchange:
Foreign exchange transaction losses were $1.3 million for the three-month and six-month periods ended June 30, 2014, and $2.3 million and $7.1 million for the three-month and six-month periods ended June 30, 2013, respectively, and are included in Other (expenses) income, net in our consolidated statements of income.
NOTE 3—Income Taxes:
The effective income tax rate for the three-month and six-month periods ended June 30, 2014 was 21.7% and 20.5%, respectively, compared to 20.6% and 22.7% for the three-month and six-month periods ended June 30, 2013. The Company’s effective income tax rate fluctuates based on, among other factors, our level and location of income. The difference between the U.S. federal statutory income tax rate and our effective income tax rate for the 2014 and 2013 periods is mainly due to the impact of earnings from outside the U.S. Our effective income tax rate for the three-month and six-month periods ended June 30, 2014 was impacted by $8.2 million of restructuring and other charges (approximately $5.2 million after income taxes) as more fully described in Note 13. Our effective income tax rate for the six-month period ended June 30, 2014 was also impacted by $17.0 million of pre-tax charges (approximately $11.1 million after income taxes) in connection with a reduction of high cost supply capacity of certain aluminum alkyl products (see Note 13), and an actuarial loss of $15.4 million (approximately $9.8 million after income taxes) related to one of our U.S. defined benefit pension plans and our supplemental executive retirement plan (see Note 10).


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Table of Contents
ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 4—Earnings Per Share:
Basic and diluted earnings per share from continuing operations for the three-month and six-month periods ended June 30, 2014 and 2013 are calculated as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Basic earnings per share from continuing operations
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
89,404

 
$
88,500

 
$
155,408

 
$
176,181

Net income from continuing operations attributable to noncontrolling interests
(6,932
)
 
(8,389
)
 
(14,584
)
 
(13,918
)
Net income from continuing operations attributable to Albemarle Corporation
$
82,472

 
$
80,111

 
$
140,824

 
$
162,263

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic earnings per share
78,662

 
84,028

 
79,199

 
86,374

Basic earnings per share from continuing operations
$
1.05

 
$
0.95

 
$
1.78

 
$
1.88

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
89,404

 
$
88,500

 
$
155,408

 
$
176,181

Net income from continuing operations attributable to noncontrolling interests
(6,932
)
 
(8,389
)
 
(14,584
)
 
(13,918
)
Net income from continuing operations attributable to Albemarle Corporation
$
82,472

 
$
80,111

 
$
140,824

 
$
162,263

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic earnings per share
78,662

 
84,028

 
79,199

 
86,374

Incremental shares under stock compensation plans
429

 
461

 
403

 
488

Total shares
79,091

 
84,489

 
79,602

 
86,862

Diluted earnings per share from continuing operations
$
1.04

 
$
0.95

 
$
1.77

 
$
1.87

On February 25, 2014, the Company increased the regular quarterly dividend by 15% to $0.275 per share. On May 13, 2014, the Company declared a cash dividend of $0.275 per share, which was paid on July 1, 2014 to shareholders of record at the close of business as of June 13, 2014. On July 14, 2014, the Company declared a cash dividend of $0.275 per share, which is payable on October 1, 2014 to shareholders of record at the close of business as of September 15, 2014.
Under its existing Board authorized share repurchase program, on February 3, 2014, the Company entered into an accelerated share repurchase (ASR) agreement with Merrill Lynch International (Merrill Lynch), acting through its agent Merrill Lynch, Pierce, Fenner and Smith Incorporated, relating to a fixed-dollar, uncollared ASR program pursuant to which we purchased $50 million of our common stock from Merrill Lynch in two $25 million tranches. Pursuant to the terms of the agreement, Merrill Lynch immediately borrowed shares of Albemarle common stock that were sold to the Company, thereby decreasing the Company’s issued and outstanding shares (with no change to its authorized shares). On February 3, 2014, the Company paid $50 million to Merrill Lynch and received an initial delivery of 623,248 shares of our common stock with a fair market value of approximately $40 million. This purchase was funded with cash on hand. The Company determined that the ASR agreement with Merrill Lynch met the criteria to be accounted for as a forward contract indexed to its stock and was therefore treated as an equity instrument. Under the terms of the agreement, on April 30, 2014, the transaction was completed and we received a final settlement of 150,504 shares, calculated based on the daily Rule 10b-18 volume-weighted average prices of the Company’s common stock over the term of the agreement, less a forward price adjustment amount of approximately $0.77. The total number of shares repurchased under this agreement (773,752 shares) reduced the Company’s weighted-average shares outstanding for purposes of calculating basic and diluted earnings per share during the three-month and six-month periods ended June 30, 2014.
Under its existing Board authorized share repurchase program, on April 30, 2014, the Company entered into an ASR agreement with JPMorgan Chase Bank, National Association (JPMorgan), acting through its agent J.P. Morgan Securities LLC,

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Table of Contents
ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

relating to a fixed-dollar, uncollared ASR program pursuant to which we will purchase $100 million of our common stock from JPMorgan. The shares will be purchased by JPMorgan in two $50 million tranches that may be settled separately or simultaneously. Pursuant to the terms of the ASR Agreement, JPMorgan immediately borrowed shares of Albemarle common stock that were sold to the Company, thereby decreasing the Company’s issued and outstanding shares (with no change to its authorized shares). On May 1, 2014, the Company paid $100 million to JPMorgan and received an initial delivery of 1,193,317 shares of our common stock with a fair market value of approximately $80 million. This purchase was funded with cash on hand and commercial paper notes.
The Company has determined that the ASR agreement with JPMorgan meets the criteria to be accounted for as a forward contract indexed to its stock and is therefore being treated as an equity instrument. Although the ASR agreement with JPMorgan can be settled, at the Company’s option, in cash or in shares of common stock, the Company intends to settle in shares of common stock.
The initial delivery of 1,193,317 shares reduced the Company’s weighted average shares outstanding for purposes of calculating basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2014. The total number of shares to ultimately be purchased under the ASR Agreement with JPMorgan will be determined at the completion of the trade and will generally be based on the daily Rule 10b-18 volume-weighted average prices of the Company’s common stock over the term of the agreement.
The Company evaluated the ASR agreement with JPMorgan for its potential dilution of earnings per share and has determined that, based on the daily Rule 10b-18 volume-weighted average prices of the Company’s common stock calculated as of June 30, 2014, additional shares expected to be received upon final settlement (approximately 231,000 shares) would have an anti-dilutive impact on earnings per share and therefore were not included in the Company’s diluted earnings per share calculation for the three-month and six-month periods ended June 30, 2014. The final settlement amount may increase or decrease depending upon the daily Rule 10b-18 volume-weighted average prices of the Company’s common stock during the remaining term of the agreement.
As announced on July 15, 2014, the Company and Rockwood Holdings, Inc. (“Rockwood”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which the Company will acquire Rockwood in a cash and stock transaction. Refer to Note 17, “Subsequent Events” for additional information about this transaction. Pursuant to the terms of the ASR Agreement with JPMorgan, the period over which the Rule 10b-18 volume-weighted average prices of the Company’s common stock is calculated has been suspended, effective as of the date of the Merger Agreement. Final settlement is expected to occur approximately twelve trading days after the later of (a) the completion of the transaction, or (b) the completion of any restricted period (as defined under Regulation M of the Exchange Act) related to the transaction. However, final settlement may be accelerated at the option of JPMorgan, and the number of shares to be delivered may be adjusted upon the announcement or occurrence of certain corporate events, including without limitation, tender offers, delisting, merger events or insolvency. Additionally, the ASR agreement with JPMorgan will be terminated at any time that our share price is at or below $33.50 per share.
During the six-month period ended June 30, 2014, the Company repurchased a total of 1,967,069 shares of its common stock pursuant to the terms of its share repurchase program. As of June 30, 2014, there were 3,972,525 remaining shares available for repurchase under the Company’s authorized share repurchase program.
NOTE 5—Inventories:
The following table provides a breakdown of inventories at June 30, 2014 and December 31, 2013:
 
June 30,
 
December 31,
 
2014
 
2013
 
(In thousands)
Finished goods
$
280,886

 
$
340,863

Raw materials
43,708

 
47,784

Stores, supplies and other
45,970

 
47,402

Total inventories(a)
$
370,564

 
$
436,049


(a)
As of June 30, 2014, $58.1 million of inventories (consisting primarily of finished goods) were classified as Assets of discontinued operations held for sale in the condensed consolidated balance sheets. See Note 15, “Discontinued Operations” for additional information.

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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 6—Investments:
The carrying value of our unconsolidated investment in Stannica LLC, a variable interest entity for which we are not the primary beneficiary, was $5.8 million and $5.5 million at June 30, 2014 and December 31, 2013, respectively. Our maximum exposure to loss in connection with our continuing involvement with Stannica LLC is limited to our investment carrying value.


NOTE 7—Long-Term Debt:
Long-term debt at June 30, 2014 and December 31, 2013 consisted of the following:
 
June 30,
 
December 31,
 
2014
 
2013
 
(In thousands)
5.10% Senior notes, net of unamortized discount of $20 at June 30, 2014 and $36 at December 31, 2013
$
324,980

 
$
324,964

4.50% Senior notes, net of unamortized discount of $2,028 at June 30, 2014 and $2,186 at December 31, 2013
347,972

 
347,814

Commercial paper notes
363,000

 
363,000

Fixed-rate foreign borrowings
4,951

 
7,879

Variable-rate foreign bank loans
22,266

 
34,910

Miscellaneous
197

 
297

Total long-term debt
1,063,366

 
1,078,864

Less amounts due within one year
377,521

 
24,554

Long-term debt, less current portion
$
685,845

 
$
1,054,310

On February 7, 2014, we entered into a new $750.0 million credit facility. The five-year, revolving, unsecured credit agreement (hereinafter referred to as the February 2014 credit agreement) matures on February 7, 2019 and (i) replaces our previous $750.0 million amended and restated credit agreement dated as of September 22, 2011; (ii) provides for an additional $250.0 million in credit, if needed, subject to the terms of the agreement; and (iii) provides for the ability to extend the maturity date under certain conditions. Borrowings bear interest at variable rates based on the London Inter-Bank Offered Rate (LIBOR) for deposits in the relevant currency plus an applicable margin which ranges from 0.900% to 1.500%, depending on the Company’s credit rating from Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Services (Moody’s). The applicable margin on the facility was 1.000% as of June 30, 2014. As of June 30, 2014, there were no borrowings outstanding under the February 2014 credit agreement.
At June 30, 2014, we had $363.0 million of commercial paper notes (the “Notes”) outstanding bearing a weighted-average interest rate of approximately 0.25% and a weighted-average maturity of 20 days. In the second quarter of 2014, the Notes were reclassified from Long-term debt to Current portion of long-term debt in our condensed consolidated balance sheet.
Our $325.0 million aggregate principal amount of senior notes, issued on January 20, 2005, mature on February 1, 2015. At June 30, 2014, we have classified these senior notes as long-term based on our ability and intent to refinance them on a long-term basis through the issuance of new senior notes or borrowings under the February 2014 credit agreement.
NOTE 8—Commitments and Contingencies:
We had the following activity in our recorded environmental liabilities for the six months ended June 30, 2014, as follows (in thousands):
Beginning balance at December 31, 2013
$
16,599

Expenditures
(1,626
)
Reclassified as Liabilities of discontinued operations held for sale
(2,000
)
Changes in estimates recorded to earnings and other
34

Foreign currency translation
38

Ending balance at June 30, 2014
13,045

Less amounts reported in Accrued expenses
7,133

Amounts reported in Other noncurrent liabilities
$
5,912


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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

The amounts recorded represent our future remediation and other anticipated environmental liabilities. 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 these remediation liabilities, 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 $17 million before income taxes.
Approximately $6.4 million of our recorded liability is related to the closure and post-closure activities at a former landfill associated with our Bergheim, Germany site, 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. In connection with the remediation activities at our Bergheim, Germany site as required by the German environmental authorities, we have pledged certain of our land and housing facilities at this site which has an estimated fair value of $6.1 million.
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.
On July 3, 2006, we received a Notice of Violation (the 2006 NOV) from the U.S. Environmental Protection Agency Region 4 (EPA) regarding the implementation of the Pharmaceutical Maximum Achievable Control Technology (PharmaMACT) standards at our plant in Orangeburg, South Carolina. The alleged violations involved (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. In the second quarter of 2011, the Company was served with a complaint by the EPA in the U.S. District Court for the District of South Carolina, based on the alleged violations set out in the 2006 NOV seeking civil penalties and injunctive relief. The complaint was subsequently amended to add the State of South Carolina as a plaintiff. On June 11, 2014, we entered into a consent decree with the EPA and the South Carolina Department of Health and Environmental Control (DHEC) to settle this matter. Pursuant to the consent decree, we will pay a civil penalty to the EPA in the amount of approximately $332,000. A civil penalty of approximately $112,000 was waived pursuant to the consent decree and we will not be required to pay this amount to the DHEC. The Company is also required to submit certain reports and supporting data within 30 days of the consent decree becoming effective.
In addition, we are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings seeking remediation under environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as CERCLA or Superfund, products liability, breach of contract 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. Costs for legal services are generally expensed as incurred.
We have contracts with certain of our customers, which serve as guarantees on product delivery and performance according to customer specifications that can cover both shipments on an individual basis as well as blanket coverage of multiple shipments under customer supply contracts that are executed through certain financial institutions. The financial coverage provided by these guarantees is typically based on a percentage of net sales value.


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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 9—Operating Segments:
Effective January 1, 2014, the Company’s assets and businesses were realigned under two operating segments to better align the Company’s resources to support its ongoing business strategy. The Performance Chemicals segment includes the Fire Safety Solutions, Specialty Chemicals and Fine Chemistry Services product categories, consolidating our bromine, mineral and custom manufacturing assets under one business unit. The Catalyst Solutions segment includes the Refinery Catalyst Solutions and Performance Catalyst Solutions product categories. Each segment has a dedicated team of sales, research and development, process engineering, manufacturing and sourcing, and business strategy personnel and has full accountability for improving execution through greater asset and market focus, agility and responsiveness. The new structure also facilitates the continued standardization of business processes across the organization as part of our ongoing One Albemarle strategy. The new segment structure is consistent with the manner in which information is presently used internally by the Company’s chief operating decision maker to evaluate performance and make resource allocation decisions, and each segment president is responsible for execution of the segment’s business strategy.
Segment income represents segment operating profit and equity in net income of unconsolidated investments and is reduced by net income attributable to noncontrolling interests. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs.
Summarized financial information concerning our reportable segments is shown in the following table. Results for 2013 have been recast to reflect the change in operating segments noted above, and segment results for all periods presented exclude discontinued operations as further described in Notes 1 and 15. Corporate & other includes corporate-related items not allocated to the reportable segments. Pension and OPEB service cost (which represents the benefits earned by active employees during the period) and amortization of prior service cost or benefit are allocated to each segment whereas the remaining components of pension and OPEB benefits cost or credit are included in Corporate & other.


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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net sales:
 
 
 
 
 
 
 
Performance Chemicals
$
334,187

 
$
343,024

 
$
684,444

 
$
694,048

Catalyst Solutions
270,534

 
233,818

 
520,120

 
469,391

Total net sales
$
604,721

 
$
576,842

 
$
1,204,564

 
$
1,163,439

Segment operating profit:
 
 
 
 
 
 
 
Performance Chemicals
$
77,265

 
$
88,694

 
$
157,741

 
$
174,159

Catalyst Solutions
59,918

 
36,271

 
109,130

 
78,410

Total segment operating profit
137,183

 
124,965

 
266,871

 
252,569

Equity in net income of unconsolidated investments:
 
 
 
 
 
 
 
Performance Chemicals
2,660

 
2,328

 
5,577

 
4,636

Catalyst Solutions
7,989

 
7,381

 
13,973

 
15,334

Total equity in net income of unconsolidated investments
10,649

 
9,709

 
19,550

 
19,970

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Performance Chemicals
(6,932
)
 
(8,389
)
 
(14,584
)
 
(13,918
)
Total net income attributable to noncontrolling interests
(6,932
)
 
(8,389
)
 
(14,584
)
 
(13,918
)
Segment income:
 
 
 
 
 
 
 
Performance Chemicals
72,993

 
82,633

 
148,734

 
164,877

Catalyst Solutions
67,907

 
43,652

 
123,103

 
93,744

Total segment income
140,900

 
126,285

 
271,837

 
258,621

Corporate & other(a)
(18,768
)
 
(16,585
)
 
(53,533
)
 
(31,806
)
Restructuring and other charges, net
(8,175
)
 

 
(25,175
)
 

Interest and financing expenses
(8,733
)
 
(7,608
)
 
(17,506
)
 
(12,839
)
Other (expenses) income, net
(979
)
 
(1,585
)
 
164

 
(5,779
)
Income tax expense
(21,773
)
 
(20,396
)
 
(34,963
)
 
(45,934
)
(Loss) income from discontinued operations (net of tax)
(60,025
)
 
2,628

 
(61,794
)
 
4,463

Net income attributable to Albemarle Corporation
$
22,447

 
$
82,739

 
$
79,030

 
$
166,726


(a)
For the three months ended June 30, 2014 and 2013, Corporate & other includes $0.9 million and $0.9 million, respectively, of pension and OPEB plan credits, and for the six months ended June 30, 2014 and 2013, Corporate & other includes $(13.7) million and $2.0 million, respectively, of pension and OPEB plan (costs) credits.



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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 10—Pension Plans and Other Postretirement Benefits:
The following information is provided for domestic and foreign pension and postretirement defined benefit plans:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Pension Benefits Cost (Credit):
 
 
 
 
 
 
 
Service cost
$
2,726

 
$
3,332

 
$
5,567

 
$
6,974

Interest cost
8,128

 
7,715

 
16,297

 
14,933

Expected return on assets
(10,172
)
 
(9,821
)
 
(20,377
)
 
(19,693
)
Actuarial loss(a)

 

 
15,432

 

Amortization of prior service benefit
(138
)
 
(295
)
 
(411
)
 
(344
)
Total net pension benefits cost
$
544

 
$
931

 
$
16,508

 
$
1,870

Postretirement Benefits Cost (Credit):
 
 
 
 
 
 
 
Service cost
$
54

 
$
71

 
$
108

 
$
154

Interest cost
760

 
694

 
1,520

 
1,382

Expected return on assets
(86
)
 
(103
)
 
(171
)
 
(206
)
Amortization of prior service benefit
(24
)
 
(23
)
 
(48
)
 
(48
)
Total net postretirement benefits cost
$
704

 
$
639

 
$
1,409

 
$
1,282

Total net pension and postretirement benefits cost
$
1,248

 
$
1,570

 
$
17,917

 
$
3,152


(a)
In connection with the announced realignment of our operating segments effective January 1, 2014, in the fourth quarter of 2013 we initiated a workforce reduction plan which will result in a reduction of approximately 230 employees worldwide. This workforce reduction triggered a net curtailment gain of approximately $0.8 million in the first quarter of 2014 for one of our U.S. defined benefit plans and our supplemental executive retirement plan (SERP). In connection with the curtailment, we were required to remeasure the related assets and obligations for these plans. As of the January 31, 2014 remeasurement date, the weighted-average discount rate for our domestic pension plans was reduced from 5.14% to 4.97%. Taking into account the discount rate reduction and actual return on plan assets through January 31, 2014, we recorded a mark-to-market actuarial loss (net of the curtailment gain) for the first quarter of 2014 of $15.4 million.
During the three-month and six-month periods ended June 30, 2014, we made contributions of $1.2 million and $2.3 million, respectively, to our qualified and nonqualified pension plans. During the three-month and six-month periods ended June 30, 2013, we made contributions of $1.4 million and $2.0 million, respectively, to our qualified and nonqualified pension plans.
We paid $1.0 million and $2.4 million in premiums to the U.S. postretirement benefit plan during the three-month and six-month periods ended June 30, 2014, respectively. During the three-month and six-month periods ended June 30, 2013, we paid $1.1 million and $2.2 million in premiums to the U.S. postretirement benefit plan.



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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 11—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:
Long-Term Debt—the fair values of our senior notes and other fixed rate foreign borrowings are estimated using Level 1 inputs and account for the majority of the difference between the recorded amount and fair value of our long-term debt. The carrying value of our remaining long-term debt reported in the accompanying condensed consolidated balance sheets approximates fair value as substantially all of such debt bears interest based on prevailing variable market rates currently available in the countries in which we have borrowings.

 
June 30, 2014
 
December 31, 2013
 
Recorded
Amount
 
Fair Value
 
Recorded
Amount
 
Fair Value
 
(In thousands)
Long-term debt
$
1,063,366

 
$
1,095,344

 
$
1,078,864

 
$
1,109,878

Foreign Currency Forward Contracts—we enter into foreign currency forward contracts in connection with our risk management strategies in an attempt to minimize the financial impact of changes in foreign currency exchange rates. These derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. The fair values of our foreign currency forward contracts are estimated based on current settlement values. At June 30, 2014 and December 31, 2013, we had outstanding foreign currency forward contracts with notional values totaling $159.6 million and $321.4 million, respectively. At June 30, 2014, $0.2 million was included in Other accounts receivable and $0.2 million was included in Accrued expenses associated with the fair value of our foreign currency forward contracts. At December 31, 2013, $0.2 million was included in Other accounts receivable associated with the fair value of our foreign currency forward contracts.
Gains and losses on foreign currency forward contracts are recognized currently in Other income (expenses), net; further, fluctuations in the value of these contracts are generally expected to be offset by changes in the value of the underlying exposures being hedged. For the three-month and six-month periods ended June 30, 2014, we recognized losses of $(1.3) million and $(2.4) million, respectively, in Other income (expenses), net in our consolidated statements of income related to the change in the fair value of our foreign currency forward contracts. For the three-month and six-month periods ended June 30, 2013, we recognized gains (losses) of $2.5 million and $(2.2) million, respectively, in Other income (expenses), net in our consolidated statements of income related to the change in the fair value of our foreign currency forward contracts. These amounts are generally expected to be offset by changes in the value of the underlying exposures being hedged which are also reported in Other income (expenses), net. Also, for the six-month periods ended June 30, 2014 and 2013, we recorded $2.4 million and $2.2 million, respectively, related to the change in the fair value of our foreign currency forward contracts, and cash settlements of $(2.2) million and $(2.5) million, respectively, in Other, net in our condensed consolidated statements of cash flows.
Interest Rate Swap—In anticipation of refinancing our 2015 senior notes in the fourth quarter of 2014, on January 22, 2014, we entered into a pay fixed, receive variable rate forward starting interest rate swap with J.P. Morgan Chase Bank, N.A., to be effective October 15, 2014. Our risk management objective and strategy for undertaking this hedge is to eliminate the variability in the interest rate and partial credit spread on the 20 future semi-annual coupon payments that we would pay when we refinance our 2015 senior notes with another 10 year note. The notional amount of the swap is $325.0 million and the fixed rate is 3.281%. A cash settlement will occur on the termination date determined by reference to the changes in the U.S. dollar 3-month LIBOR and credit spreads from the date we entered into the swap until the date we terminate the swap. This derivative financial instrument has been designated and is accounted for as a cash flow hedge under Accounting Standards Codification (ASC) 815, Derivatives and Hedging. Effectiveness of the hedge relationship is assessed prospectively and retrospectively on a quarterly basis. At June 30, 2014, the fair value of our pay fixed, receive variable rate forward starting interest rate swap was a liability of $16.4 million and is included in Accrued expenses. We determined there was no ineffectiveness during the six-month period ended June 30, 2014, which resulted in the entire change in fair value of this swap being recorded in Accumulated other comprehensive income.
The counterparties to our foreign currency forward contracts and our interest rate swap 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.


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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

NOTE 12—Fair Value Measurement:
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

Assets Measured at Fair Value on a Recurring Basis
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. Transfers between levels of the fair value hierarchy are deemed to have occurred on the date of the event or change in circumstance that caused the transfer. There were no transfers between Levels 1 and 2 during the six-month period ended June 30, 2014. The following tables set forth our financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):
 
June 30, 2014
 
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)
$
22,014

 
$
22,014

 
$

 
$

Private equity securities(b)
$
1,852

 
$
30

 
$

 
$
1,822

Foreign currency forward contracts(d)
$
167

 
$

 
$
167

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Obligations under executive deferred compensation plan(a)
$
22,014

 
$
22,014

 
$

 
$

Interest rate swap contract(c)
$
16,420

 
$

 
$
16,420

 
$

Foreign currency forward contracts(d)
$
200

 
$

 
$
200

 
$


 
December 31, 2013
 
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)
$
23,030

 
$
23,030

 
$

 
$

Private equity securities(b)
$
771

 
$
21

 
$

 
$
750

Foreign currency forward contracts(d)
$
161

 
$

 
$
161

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Obligations under executive deferred compensation plan(a)
$
23,030

 
$
23,030

 
$

 
$


(a)
We maintain an Executive Deferred Compensation Plan (EDCP) that was adopted in 2001 and subsequently amended. The purpose of the EDCP is to provide current tax planning opportunities as well as supplemental funds upon the retirement or death of certain of our employees. The EDCP 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 (the Trust) that was created to provide a source of funds to assist in meeting the obligations of the EDCP, 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

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Table of Contents
ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

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)
Primarily consists of private equity securities classified as available-for-sale and are reported in Investments in the condensed consolidated balance sheets. The changes in fair value are reported in Other income (expenses), net in our consolidated statements of income. Holdings in private equity securities are typically valued using the net asset valuations provided by the underlying private investment companies and as such are classified within Level 3.
(c)
In anticipation of refinancing our 2015 senior notes in the fourth quarter of 2014, on January 22, 2014, we entered into a pay fixed, receive variable rate forward starting interest rate swap, to be effective October 15, 2014. This derivative financial instrument has been designated and is accounted for as a cash flow hedge under ASC 815, Derivatives and Hedging. The fair value of the forward starting interest rate swap was calculated based on inputs derived from observable market data and as such is classified within Level 2. See Note 11 for additional details about this interest rate swap contract.
(d)
As a result of our global operating and financing activities, we are exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, we minimize our risks from foreign currency exchange rate fluctuations through the use of foreign currency forward contracts. These derivative financial instruments are not designated as hedging instruments under ASC 815, Derivatives and Hedging. 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.

The following table presents the fair value reconciliation of Level 3 assets measured at fair value on a recurring basis for the periods indicated:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
717

 
$

 
$
750

 
$

Total unrealized gains included in earnings relating to assets still held at the reporting date
105

 

 
72

 

Purchases
1,000

 

 
1,000

 

Ending balance
$
1,822

 
$

 
$
1,822

 
$


Assets Measured at Fair Value on a Non-Recurring Basis
As discussed in Note 15 “Discontinued Operations,” during the second quarter of 2014, the Company signed a definitive agreement to sell certain businesses and assets to SI Group, Inc., and we recorded a pre-tax charge of $80.7 million ($60.3 million after income taxes) related to the expected loss on the anticipated sale of the assets. The expected loss represents the difference between the carrying value of the related assets and their estimated fair value, based on the estimated sales price as outlined in the agreement less estimated costs to sell. Accordingly, the fair value measurement is classified as Level 3 in the fair value hierarchy.

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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)


NOTE 13—Restructuring and Other
In connection with the announced realignment of our operating segments effective January 1, 2014, in the fourth quarter of 2013 we initiated a workforce reduction plan which will result in a reduction of approximately 230 employees worldwide. Payments under this workforce reduction plan are expected to be substantially complete in 2014. We had the following activity in our recorded workforce reduction liabilities for the six months ended June 30, 2014 (in thousands):
Beginning balance at December 31, 2013
$
39,104

Workforce reduction charges

Payments
(25,302
)
Amount reversed to income(a)
(1,095
)
Foreign currency translation
(148
)
Ending balance at June 30, 2014
$
12,559

Amounts reported in Accrued expenses
$
12,559


(a)
Amount reversed to income reflects adjustments based on actual timing and amount of final settlements.

During the first quarter of 2014 we initiated action to reduce high cost supply capacity of certain aluminum alkyl products, primarily through the termination of a third party manufacturing contract. Based on the contract termination, we estimate costs of approximately $14.0 million (recorded in Accrued expenses at June 30, 2014) for contract termination and volume commitments. Additionally, we have recorded an impairment charge of $3.0 million for certain capital project costs also related to aluminum alkyls capacity which we do not expect to recover. After income taxes, these charges were approximately $11.1 million.
Included in Restructuring and other charges, net for the second quarter of 2014 are $4.9 million ($3.1 million after income taxes) of certain significant acquisition-related costs, and a write-off of $3.3 million ($2.1 million after income taxes) for certain multi-product facility project costs that we do not expect to recover in future periods.

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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)


NOTE 14—Accumulated Other Comprehensive Income:
The components and activity in Accumulated other comprehensive income (net of deferred income taxes) consisted of the following during the periods indicated below (in thousands):
 
Foreign
Currency
Translation
 
Pension
and Post-
Retirement
Benefits(a)
 
Unrealized Loss on Interest Rate Swap
 
Other
 
Total
Three months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Balance at March 31, 2014
$
111,424

 
$
186

 
$
(4,011
)
 
$
(672
)
 
$
106,927

Other comprehensive (loss) income before reclassifications
(804
)
 

 
(6,410
)
 
3

 
(7,211
)
Amounts reclassified from accumulated other comprehensive income

 
(167
)
 

 
34

 
(133
)
Other comprehensive (loss) income, net of tax
(804
)
 
(167
)
 
(6,410
)
 
37

 
(7,344
)
Other comprehensive loss attributable to noncontrolling interests
61

 

 

 

 
61

Balance at June 30, 2014
$
110,681

 
$
19

 
$
(10,421
)
 
$
(635
)
 
$
99,644

Three months ended June 30, 2013
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
$
50,904

 
$
915

 
$

 
$
(810
)
 
$
51,009

Other comprehensive income (loss) before reclassifications
5,241

 

 

 
(3
)
 
5,238

Amounts reclassified from accumulated other comprehensive income

 
(330
)
 

 
32

 
(298
)
Other comprehensive income (loss), net of tax
5,241

 
(330
)
 

 
29

 
4,940

Other comprehensive loss attributable to noncontrolling interests
233

 

 

 

 
233

Balance at June 30, 2013
$
56,378

 
$
585

 
$

 
$
(781
)
 
$
56,182

Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
116,465

 
$
487

 
$

 
$
(707
)
 
$
116,245

Other comprehensive (loss) income before reclassifications
(6,062
)
 

 
(10,421
)
 
3

 
(16,480
)
Amounts reclassified from accumulated other comprehensive income

 
(468
)
 

 
69

 
(399
)
Other comprehensive (loss) income, net of tax
(6,062
)
 
(468
)
 
(10,421
)
 
72

 
(16,879
)
Other comprehensive loss attributable to noncontrolling interests
278

 

 

 

 
278

Balance at June 30, 2014
$
110,681

 
$
19

 
$
(10,421
)
 
$
(635
)
 
$
99,644

Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
85,117

 
$
989

 
$

 
$
(842
)
 
$
85,264

Other comprehensive (loss) income before reclassifications
(28,668
)
 

 

 
(5
)
 
(28,673
)
Amounts reclassified from accumulated other comprehensive income

 
(404
)
 

 
66

 
(338
)
Other comprehensive (loss) income, net of tax
(28,668
)
 
(404
)
 

 
61

 
(29,011
)
Other comprehensive income attributable to noncontrolling interests
(71
)
 

 

 

 
(71
)
Balance at June 30, 2013
$
56,378

 
$
585

 
$

 
$
(781
)
 
$
56,182


(a)
Amounts reclassified from accumulated other comprehensive income consist of amortization of prior service benefit. See Note 10, “Pension Plans and Other Postretirement Benefits.”

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Table of Contents
ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

The amount of income tax benefit (expense) allocated to each component of Other comprehensive income (loss) for the three-month and six-month periods ended June 30, 2014 and 2013 is provided in the following (in thousands):
 
Three Months Ended June 30,
 
2014
 
2013
 
Foreign
Currency
Translation
 
Pension
and Post-
retirement
Benefits
 
Unrealized Loss on Interest Rate Swap
 
Other
 
Foreign
Currency
Translation
 
Pension
and Post-
retirement
Benefits
 
Other
Other comprehensive income (loss), before tax
$
(613
)
 
$
(162
)
 
$
(10,101
)
 
$
57

 
$
4,470

 
$
(318
)
 
$
49

Income tax benefit (expense)
(191
)
 
(5
)
 
3,691

 
(20
)
 
771

 
(12
)
 
(20
)
Other comprehensive income (loss), net of tax
$
(804
)
 
$
(167
)
 
$
(6,410
)
 
$
37

 
$
5,241

 
$
(330
)
 
$
29


 
Six Months Ended June 30,
 
2014
 
2013
 
Foreign
Currency
Translation
 
Pension
and Post-
retirement
Benefits
 
Unrealized Loss on Interest Rate Swap
 
Other
 
Foreign
Currency
Translation
 
Pension
and Post-
retirement
Benefits
 
Other
Other comprehensive income (loss), before tax
$
(5,336
)
 
$
(459
)
 
$
(16,420
)
 
$
111

 
$
(29,782
)
 
$
(392
)
 
$
101

Income tax benefit (expense)
(726
)
 
(9
)
 
5,999

 
(39
)
 
1,114

 
(12
)
 
(40
)
Other comprehensive income (loss), net of tax
$
(6,062
)
 
$
(468
)
 
$
(10,421
)
 
$
72

 
$
(28,668
)
 
$
(404
)
 
$
61



NOTE 15—Discontinued Operations:
On April 15, 2014, the Company signed a definitive agreement to sell its antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc. for an undisclosed amount of cash. Included in the transaction are Albemarle’s manufacturing sites in Orangeburg, South Carolina and Jinshan, China, along with Albemarle’s antioxidant product lines manufactured in Ningbo, China. The sale is subject to customary closing conditions and is expected to close later in 2014.
In the second quarter of 2014, the Company began accounting for these assets as held for sale and recorded a pre-tax charge of $80.7 million ($60.3 million after income taxes) related to the expected loss on the anticipated sale of the assets. The expected loss represents the difference between the carrying value of the related assets and their estimated fair value, based on the estimated sales price as outlined in the agreement less estimated costs to sell. The expected loss is primarily attributable to goodwill, intangibles and long-lived assets which are included in the assets classified as held for sale at June 30, 2014. Cumulative foreign currency translation gains of $16.7 million were also included in the assessment of the assets’ carrying value for purposes of calculating the expected loss. The final selling price of these assets may be higher or lower than our current assessment of fair value. The expected loss and estimated costs to sell, net of related taxes, are included in (Loss) income from discontinued operations in our consolidated statements of income for the three-month and six-month periods ended June 30, 2014. A summary of results of discontinued operations is as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
59,412

 
$
57,355

 
$
116,248

 
$
112,383

 
 
 
 
 
 
 
 
(Loss) income from discontinued operations
$
(80,174
)
 
$
3,682

 
$
(82,687
)
 
$
6,171

Income tax (benefit) expense
(20,149
)
 
1,054

 
(20,893
)
 
1,708

(Loss) income from discontinued operations (net of tax)
$
(60,025
)
 
$
2,628

 
$
(61,794
)
 
$
4,463


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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

The carrying amounts of the major classes of assets and liabilities that were classified as held for sale at June 30, 2014, are as follows (in thousands):
 
June 30, 2014
Assets
 
Inventories
$
58,108

All other current assets
4,140

Net property, plant and equipment
52,367

Other intangibles, net of amortization
23,250

All other noncurrent assets
119

Assets of discontinued operations held for sale
$
137,984

Liabilities
 
Accounts payable
$
4,140

All other current liabilities
438

Noncurrent liabilities
6,600

Liabilities of discontinued operations held for sale
$
11,178

Assets of discontinued operations held for sale and related liabilities are classified as current in the condensed consolidated balance sheet as of June 30, 2014 because the Company expects to complete the sale of such assets in 2014.

NOTE 16—Recently Issued Accounting Pronouncements:
In February 2013, the Financial Accounting Standards Board (FASB) issued accounting guidance that requires entities that have obligations resulting from joint and several liability arrangements and for which the total amount is fixed at the reporting date to measure such obligations as the sum of (a) the amount the entity agreed to pay on the basis of its arrangement among its co-obligors, and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. Entities are also required to disclose the nature, amount and any other relevant information about such obligations. These amendments became effective on January 1, 2014 and had no impact on our consolidated financial statements.
In March 2013, the FASB issued accounting guidance that clarifies a parent company’s accounting for the cumulative foreign currency translation adjustment when the parent sells a part or all of its investment in a foreign entity. The guidance clarifies that the sale of an investment in a foreign entity includes both (a) events that result in the loss of a controlling financial interest in a foreign entity, and (b) events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes also referred to as a step acquisition). Accordingly, the cumulative foreign currency translation adjustment should be released into net income upon the occurrence of those events. These amendments became effective on January 1, 2014 and will be applied prospectively. The impact of these new requirements on our financial statements will depend upon the nature, terms and size of derecognition events, if any, that may occur in the future related to any of our foreign entities.
In July 2013, the FASB issued accounting guidance designed to reduce diversity in practice of financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. These new requirements became effective on January 1, 2014 and did not have a material effect on our consolidated financial statements.
In April 2014, the FASB issued accounting guidance that changes the criteria for reporting discontinued operations and modifies related disclosure requirements to provide users of financial statements with more information about the assets, liabilities, revenues and expenses of discontinued operations. The guidance improves the definition of discontinued operations by limiting its scope to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Additionally, these new requirements require entities to disclose the pretax profit or loss related to disposals of significant components that do not qualify as discontinued operations. These new requirements become effective for public entities in annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted for items that have not been reported as disposals or as held for sale in previously issued financial statements. We are assessing the impact of these new requirements on our financial statements.

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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

In May 2014, the FASB issued accounting guidance that will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that revenue recognized from a transaction or event that arises from a contract with a customer should reflect the consideration to which an entity expects to be entitled in exchange for goods or services provided. To achieve that core principle the new guidance sets forth a five-step revenue recognition model that will need to be applied consistently to all contracts with customers, except those that are within the scope of other topics in the ASC. Also required are enhanced disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. The enhanced disclosures include qualitative and quantitative information about contracts with customers, significant judgments made in applying the revenue guidance, and assets recognized related to the costs to obtain or fulfill a contract. These new requirements become effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is prohibited. We are assessing the impact of these new requirements on our financial statements.
In June 2014, the FASB issued accounting guidance which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The accounting guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. These new requirements become effective for annual and interim reporting periods beginning after December 15, 2015, and early adoption is permitted. We are assessing the impact of these new requirements on our financial statements.

NOTE 17—Subsequent Events:

Proposed Acquisition of Rockwood Holdings, Inc.
On July 15, 2014, Albemarle and Rockwood entered into the Merger Agreement pursuant to which Albemarle will acquire Rockwood in a cash and stock transaction valued at approximately $6.2 billion. Under the terms of the transaction, each outstanding share of Rockwood common stock will be exchanged for $50.65 in cash and 0.4803 of a share of Albemarle common stock. The transaction values Rockwood at $85.53 per share, based on the closing price of Albemarle’s shares on July 14, 2014. Upon closing of the transaction, Albemarle shareholders will own approximately 70% of the combined company and Rockwood shareholders will own approximately 30% of the combined company. The boards of directors of both Albemarle and Rockwood have approved the transaction. The transaction is subject to shareholder and regulatory approvals and other customary closing conditions and is expected to close by the first quarter of 2015.



23

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion and analysis of our financial condition and results of operations since December 31, 2013. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading “Financial Condition and Liquidity” on page 36.
Forward-looking Statements
Some of the information presented in this Quarterly Report on Form 10-Q, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “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. Therefore, there can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:
changes in economic and business conditions;
changes in financial and operating performance of our major customers and industries and markets served by us;
the timing of orders received from customers;
the gain or loss of significant customers;
competition from other manufacturers;
changes in the demand for our products;
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 ability to pass through such increases;
acquisitions and divestitures, and changes in performance of acquired companies;
changes in our markets in general;