09.30.2014 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 September 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 October 24, 2014: 78,253,709

Table of Contents

ALBEMARLE CORPORATION
INDEX – FORM 10-Q
 
 
 
 
 
 
Page
Number(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8-23
 
 
 
24-43
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
642,418

 
$
591,196

 
$
1,846,982

 
$
1,754,635

Cost of goods sold
436,972

 
381,585

 
1,238,574

 
1,157,443

Gross profit
205,446

 
209,611

 
608,408

 
597,192

Selling, general and administrative expenses
66,012

 
61,368

 
211,127

 
186,668

Research and development expenses
22,407

 
19,441

 
66,916

 
60,959

Restructuring and other charges, net (Note 13)
293

 
—

 
20,625

 
—

Acquisition and integration related costs
10,261

 
—

 
15,104

 
—

Operating profit
106,473

 
128,802

 
294,636

 
349,565

Interest and financing expenses
(8,749
)
 
(9,496
)
 
(26,255
)
 
(22,335
)
Other expenses, net
(6,618
)
 
(368
)
 
(6,454
)
 
(6,147
)
Income from continuing operations before income taxes and equity in net income of unconsolidated investments
91,106

 
118,938

 
261,927

 
321,083

Income tax expense
11,737

 
26,963

 
46,700

 
72,897

Income from continuing operations before equity in net income of unconsolidated investments
79,369

 
91,975

 
215,227

 
248,186

Equity in net income of unconsolidated investments (net of tax)
8,650

 
5,338

 
28,200

 
25,308

Net income from continuing operations
88,019

 
97,313

 
243,427

 
273,494

(Loss) income from discontinued operations (net of tax)
(6,679
)
 
531

 
(68,473
)
 
4,994

Net income
81,340

 
97,844

 
174,954

 
278,488

Net income attributable to noncontrolling interests
(8,546
)
 
(7,332
)
 
(23,130
)
 
(21,250
)
Net income attributable to Albemarle Corporation
$
72,794

 
$
90,512

 
$
151,824

 
$
257,238

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
1.02

 
$
1.10

 
$
2.79

 
$
2.98

Discontinued operations
(0.09
)
 
0.01

 
(0.87
)
 
0.06

 
$
0.93

 
$
1.11

 
$
1.92

 
$
3.04

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
1.01

 
$
1.10

 
$
2.78

 
$
2.96

Discontinued operations
(0.08
)
 
0.01

 
(0.87
)
 
0.06

 
$
0.93

 
$
1.11

 
$
1.91

 
$
3.02

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
78,244

 
81,385

 
78,880

 
84,711

Weighted-average common shares outstanding – diluted
78,659

 
81,852

 
79,287

 
85,192

Cash dividends declared per share of common stock
$
0.275

 
$
0.240

 
$
0.825

 
$
0.720

See accompanying Notes to the Condensed Consolidated Financial Statements.

3
Table of Contents

ALBEMARLE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
81,340

 
$
97,844

 
$
174,954

 
$
278,488

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(100,318
)
 
40,613

 
(106,380
)
 
11,945

Pension and postretirement benefits
(147
)
 
(201
)
 
(615
)
 
(605
)
Unrealized loss on interest rate swap
(988
)
 
—

 
(11,409
)
 
—

Other
33

 
38

 
105

 
99

Total other comprehensive (loss) income, net of tax
(101,420
)
 
40,450

 
(118,299
)
 
11,439

Comprehensive (loss) income
(20,080
)
 
138,294

 
56,655

 
289,927

Comprehensive income attributable to non-controlling interests
(8,421
)
 
(7,669
)
 
(22,727
)
 
(21,658
)
Comprehensive (loss) income attributable to Albemarle Corporation
$
(28,501
)
 
$
130,625

 
$
33,928

 
$
268,269

See accompanying Notes to the Condensed Consolidated Financial Statements.

4
Table of Contents

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

 
September 30,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
653,120

 
$
477,239

Trade accounts receivable, less allowance for doubtful accounts (2014 – $1,578; 2013 – $1,614)
383,325

 
446,864

Other accounts receivable
41,261

 
45,094

Inventories
367,911

 
436,049

Other current assets
62,690

 
77,669

Total current assets
1,508,307

 
1,482,915

Property, plant and equipment, at cost
2,623,271

 
2,972,084

Less accumulated depreciation and amortization
1,392,997

 
1,615,015

Net property, plant and equipment
1,230,274

 
1,357,069

Investments
196,512

 
212,178

Other assets
160,291

 
160,229

Goodwill
251,964

 
284,203

Other intangibles, net of amortization
46,118

 
88,203

Total assets
$
3,393,466

 
$
3,584,797

Liabilities And Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
205,809

 
$
194,064

Accrued expenses
214,243

 
190,533

Current portion of long-term debt
368,268

 
24,554

Dividends payable
21,275

 
19,197

Income taxes payable
3,115

 
8,015

Total current liabilities
812,710

 
436,363

Long-term debt
684,107

 
1,054,310

Postretirement benefits
52,872

 
53,903

Pension benefits
67,659

 
57,647

Other noncurrent liabilities
93,732

 
110,610

Deferred income taxes
95,115

 
129,188

Commitments and contingencies (Note 8)

 

Equity:
 
 
 
Albemarle Corporation shareholders’ equity:
 
 
 
Common stock, $.01 par value, issued and outstanding – 78,249 in 2014 and 80,053 in 2013
782

 
801

Additional paid-in capital
6,992

 
9,957

Accumulated other comprehensive (loss) income
(1,651
)
 
116,245

Retained earnings
1,450,618

 
1,500,358

Total Albemarle Corporation shareholders’ equity
1,456,741

 
1,627,361

Noncontrolling interests
130,530

 
115,415

Total equity
1,587,271

 
1,742,776

Total liabilities and equity
$
3,393,466

 
$
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 (Loss)
 
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
 
 
 
 
 
 
 
 
 
151,824

 
151,824

 
23,130

 
174,954

Other comprehensive loss
 
 
 
 
 
 
 
(117,896
)
 
 
 
(117,896
)
 
(403
)
 
(118,299
)
Cash dividends declared
 
 
 
 
 
 
 
 
 
(64,905
)
 
(64,905
)
 
(7,612
)
 
(72,517
)
Stock-based compensation and other
 
 
 
 
 
10,016

 
 
 
 
 
10,016

 
 
 
10,016

Exercise of stock options
 
77,546

 
1

 
2,712

 
 
 
 
 
2,713

 
 
 
2,713

Shares repurchased
 
(1,967,069
)
 
(20
)
 
(13,321
)
 
 
 
(136,659
)
 
(150,000
)
 
 
 
(150,000
)
Tax benefit related to stock plans
 
 
 
 
 
836

 
 
 
 
 
836

 
 
 
836

Issuance of common stock, net
 
135,578

 
1

 
(1
)
 
 
 
 
 
—

 
 
 
—

Shares withheld for withholding taxes associated with common stock issuances
 
(50,144
)
 
(1
)
 
(3,207
)
 
 
 
 
 
(3,208
)
 
 
 
(3,208
)
Balance at September 30, 2014
 
78,248,753

 
$
782

 
$
6,992

 
$
(1,651
)
 
$
1,450,618

 
$
1,456,741

 
$
130,530

 
$
1,587,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
 
257,238

 
257,238

 
21,250

 
278,488

Other comprehensive income
 
 
 
 
 
 
 
11,031

 
 
 
11,031

 
408

 
11,439

Cash dividends declared
 
 
 
 
 
 
 
 
 
(60,288
)
 
(60,288
)
 
(10,014
)
 
(70,302
)
Stock-based compensation and other
 
 
 
 
 
6,324

 
 
 
 
 
6,324

 
 
 
6,324

Exercise of stock options
 
152,739

 
1

 
4,509

 
 
 
 
 
4,510

 
 
 
4,510

Shares repurchased
 
(7,814,045
)
 
(78
)
 
(4,556
)
 
 
 
(577,664
)
 
(582,298
)
 
 
 
(582,298
)
Tax benefit related to stock plans
 
 
 
 
 
3,078

 
 
 
 
 
3,078

 
 
 
3,078

Issuance of common stock, net
 
254,334

 
3

 
(3
)
 
 
 
 
 
—

 
 
 
—

Shares withheld for withholding taxes associated with common stock issuances
 
(96,080
)
 
(1
)
 
(6,097
)
 
 
 
 
 
(6,098
)
 
 
 
(6,098
)
Balance at September 30, 2013
 
81,396,157

 
$
814

 
$
6,016

 
$
96,295

 
$
1,363,970

 
$
1,467,095

 
$
110,054

 
$
1,577,149

See accompanying Notes to the Condensed Consolidated Financial Statements.

6
Table of Contents

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

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

 
$
477,696

Cash flows from operating activities:
 
 
 
Net income
174,954

 
278,488

Adjustments to reconcile net income to cash flows from operating activities:
 
 
 
Depreciation and amortization
78,344

 
79,477

Write-offs associated with restructuring and other
6,333

 
—

Loss on disposal of businesses
85,515

 
—

Stock-based compensation
10,447

 
7,036

Excess tax benefits realized from stock-based compensation arrangements
(836
)
 
(3,078
)
Equity in net income of unconsolidated investments (net of tax)
(28,200
)
 
(25,308
)
Dividends received from unconsolidated investments and nonmarketable securities
37,854

 
18,889

Pension and postretirement expense
21,946

 
4,730

Pension and postretirement contributions
(10,718
)
 
(9,892
)
Unrealized gain on investments in marketable securities
(525
)
 
(1,924
)
Deferred income taxes
(24,412
)
 
7,115

Working capital changes
89,020

 
(39,353
)
Other, net
(9,180
)
 
1,341

Net cash provided by operating activities
430,542

 
317,521

Cash flows from investing activities:
 
 
 
Capital expenditures
(76,682
)
 
(135,028
)
Cash payments related to acquisitions and other
—

 
(250
)
Cash proceeds from divestitures, net
104,718

 
—

Sales of marketable securities, net
943

 
1,214

Long-term advances to joint venture
(7,499
)
 
—

Net cash provided by (used in) investing activities
21,480

 
(134,064
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(3,023
)
 
(93,913
)
Proceeds from borrowings of long-term debt
—

 
117,000

Other (repayments) borrowings, net
(23,554
)
 
357,379

Dividends paid to shareholders
(62,827
)
 
(58,574
)
Dividends paid to noncontrolling interests
(7,612
)
 
(10,014
)
Repurchases of common stock
(150,000
)
 
(582,298
)
Proceeds from exercise of stock options
2,713

 
4,510

Excess tax benefits realized from stock-based compensation arrangements
836

 
3,078

Withholding taxes paid on stock-based compensation award distributions
(3,208
)
 
(6,098
)
Debt financing costs
(3,074
)
 
(108
)
Net cash used in financing activities
(249,749
)
 
(269,038
)
Net effect of foreign exchange on cash and cash equivalents
(26,392
)
 
9,312

Increase (decrease) in cash and cash equivalents
175,881

 
(76,269
)
Cash and cash equivalents at end of period
$
653,120

 
$
401,427

See accompanying Notes to the Condensed Consolidated Financial Statements.

7
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 September 30, 2014 and December 31, 2013, our consolidated statements of income and consolidated statements of comprehensive income for the three-month and nine-month periods ended September 30, 2014 and 2013 and our condensed consolidated statements of cash flows and consolidated statements of changes in equity for the nine-month periods ended September 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 August 8, 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, and to reflect the antioxidant, ibuprofen and propofol businesses as discontinued operations as described below and in Note 15 “Discontinued Operations” 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 nine-month period ended September 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 September 1, 2014, the Company closed the sale of its antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc. and, as such, the financial results of the disposed group have been presented as discontinued operations in the consolidated statements of income and excluded from segment results for all periods presented. See Note 15, “Discontinued Operations” for additional information.

NOTE 2—Foreign Exchange:
Foreign exchange transaction losses were $0.8 million and $2.1 million for the three-month and nine-month periods ended September 30, 2014, respectively, and $2.0 million and $9.1 million for the three-month and nine-month periods ended September 30, 2013, respectively, and are included in Other expenses, net, in our consolidated statements of income.
NOTE 3—Income Taxes:
The effective income tax rate for the three-month and nine-month periods ended September 30, 2014 was 12.9% and 17.8%, respectively, compared to 22.7% for the three-month and nine-month periods ended September 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 and the domestic manufacturing tax deduction. Our effective income tax rate for the three-month and nine-month periods ended September 30, 2014 was also impacted by discrete net tax benefit items of $2.1 million, related principally to the expiration of the U.S. federal statute of limitations.


8
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 nine-month periods ended September 30, 2014 and 2013 are calculated as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share amounts)
Basic earnings per share from continuing operations
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
88,019

 
$
97,313

 
$
243,427

 
$
273,494

Net income from continuing operations attributable to noncontrolling interests
(8,546
)
 
(7,332
)
 
(23,130
)
 
(21,250
)
Net income from continuing operations attributable to Albemarle Corporation
$
79,473

 
$
89,981

 
$
220,297

 
$
252,244

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic earnings per share
78,244

 
81,385

 
78,880

 
84,711

Basic earnings per share from continuing operations
$
1.02

 
$
1.10

 
$
2.79

 
$
2.98

 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
88,019

 
$
97,313

 
$
243,427

 
$
273,494

Net income from continuing operations attributable to noncontrolling interests
(8,546
)
 
(7,332
)
 
(23,130
)
 
(21,250
)
Net income from continuing operations attributable to Albemarle Corporation
$
79,473

 
$
89,981

 
$
220,297

 
$
252,244

Denominator:
 
 
 
 
 
 
 
Weighted-average common shares for basic earnings per share
78,244

 
81,385

 
78,880

 
84,711

Incremental shares under stock compensation plans
415

 
467

 
407

 
481

Total shares
78,659

 
81,852

 
79,287

 
85,192

Diluted earnings per share from continuing operations
$
1.01

 
$
1.10

 
$
2.78

 
$
2.96

On February 25, 2014, the Company increased the regular quarterly dividend by 15% to $0.275 per share. On July 14, 2014, the Company declared a cash dividend of $0.275 per share, which was paid on October 1, 2014 to shareholders of record at the close of business as of September 15, 2014. On October 14, 2014, the Company declared a cash dividend of $0.275 per share, which is payable on January 2, 2015 to shareholders of record at the close of business as of December 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 nine-month period ended September 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 nine-month period ended September 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.
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 16, “Proposed Acquisition of Rockwood” 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.
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 the date of the Merger Agreement, additional shares expected to be received upon final settlement (approximately 223,000 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 nine-month periods ended September 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.
During the nine-month period ended September 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 September 30, 2014, there were 3,972,525 remaining shares available for repurchase under the Company’s authorized share repurchase program, which has been suspended pending completion of the transactions contemplated by the Merger Agreement.
NOTE 5—Inventories:
The following table provides a breakdown of inventories at September 30, 2014 and December 31, 2013:
 
September 30,
 
December 31,
 
2014
 
2013
 
(In thousands)
Finished goods
$
268,276

 
$
340,863

Raw materials
58,896

 
47,784

Stores, supplies and other
40,739

 
47,402

Total inventories(a)
$
367,911

 
$
436,049

(a)
Decrease in Total inventories is primarily related to the sale of our antioxidant, ibuprofen and propofol businesses and assets which closed on September 1, 2014.

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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 $6.3 million and $5.5 million at September 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 September 30, 2014 and December 31, 2013 consisted of the following:
 
September 30,
 
December 31,
 
2014
 
2013
 
(In thousands)
5.10% Senior notes, net of unamortized discount of $11 at September 30, 2014 and $36 at December 31, 2013
$
324,989

 
$
324,964

4.50% Senior notes, net of unamortized discount of $1,950 at September 30, 2014 and $2,186 at December 31, 2013
348,050

 
347,814

Commercial paper notes
355,876

 
363,000

Fixed-rate foreign borrowings
4,948

 
7,879

Variable-rate foreign bank loans
18,323

 
34,910

Miscellaneous
189

 
297

Total long-term debt
1,052,375

 
1,078,864

Less amounts due within one year
368,268

 
24,554

Long-term debt, less current portion
$
684,107

 
$
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 September 30, 2014. As of September 30, 2014, there were no borrowings outstanding under the February 2014 Credit Agreement.
At September 30, 2014, we had $355.9 million of commercial paper notes (the “Notes”) outstanding bearing a weighted-average interest rate of approximately 0.31% and a weighted-average maturity of 20 days. In order to maintain flexibility with regard to our liquidity strategy, 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 September 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.
In connection with the Merger Agreement with Rockwood, on July 15, 2014, we obtained a commitment letter from certain financial institutions to provide for bridge financing, among other things, and on August 15, 2014, we entered into a term loan credit agreement and we amended the February 2014 Credit Agreement. See Note 16 “Proposed Acquisition of Rockwood” for additional information about these agreements.


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

NOTE 8—Commitments and Contingencies:
We had the following activity in our recorded environmental liabilities for the nine months ended September 30, 2014, as follows (in thousands):
Beginning balance at December 31, 2013
$
16,599

Expenditures
(2,456
)
Divestitures
(1,954
)
Changes in estimates recorded to earnings and other
34

Foreign currency translation
(604
)
Ending balance at September 30, 2014
11,619

Less amounts reported in Accrued expenses
6,055

Amounts reported in Other noncurrent liabilities
$
5,564

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 $12 million before income taxes.
Approximately $5.7 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 $5.7 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 former 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, in the third quarter of 2014 we paid 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.
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 for such proceedings. We also maintain insurance to mitigate certain of such risks. Costs for legal services are generally expensed as incurred.

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

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 certain customer supply contracts. The financial coverage provided by these guarantees is typically based on a percentage of net sales value.
The Merger Agreement with Rockwood contains provisions for the payment of termination fees and out-of-pocket fees and expenses by either party in the event that the Merger Agreement is terminated under certain circumstances. See Note 16 “Proposed Acquisition of Rockwood” for additional information about these provisions of the Merger Agreement and information about pending litigation against Albemarle and Rockwood in connection with the proposed merger.

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 our organization, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net sales:
 
 
 
 
 
 
 
Performance Chemicals
$
364,517

 
$
365,154

 
$
1,048,961

 
$
1,059,202

Catalyst Solutions
277,901

 
226,042

 
798,021

 
695,433

Total net sales
$
642,418

 
$
591,196

 
$
1,846,982

 
$
1,754,635

Segment operating profit:
 
 
 
 
 
 
 
Performance Chemicals
$
86,983

 
$
91,506

 
$
244,724

 
$
265,665

Catalyst Solutions
53,039

 
47,205

 
162,169

 
125,615

Total segment operating profit
140,022

 
138,711

 
406,893

 
391,280

Equity in net income of unconsolidated investments:
 
 
 
 
 
 
 
Performance Chemicals
1,744

 
1,735

 
7,321

 
6,371

Catalyst Solutions
6,906

 
3,603

 
20,879

 
18,937

Total equity in net income of unconsolidated investments
8,650

 
5,338

 
28,200

 
25,308

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Performance Chemicals
(8,546
)
 
(7,332
)
 
(23,130
)
 
(21,250
)
Total net income attributable to noncontrolling interests
(8,546
)
 
(7,332
)
 
(23,130
)
 
(21,250
)
Segment income:
 
 
 
 
 
 
 
Performance Chemicals
80,181

 
85,909

 
228,915

 
250,786

Catalyst Solutions
59,945

 
50,808

 
183,048

 
144,552

Total segment income
140,126

 
136,717

 
411,963

 
395,338

Corporate & other(a)
(22,995
)
 
(9,909
)
 
(76,528
)
 
(41,715
)
Restructuring and other charges, net
(293
)
 
—

 
(20,625
)
 
—

Acquisition and integration related costs
(10,261
)
 
—

 
(15,104
)
 
—

Interest and financing expenses
(8,749
)
 
(9,496
)
 
(26,255
)
 
(22,335
)
Other expenses, net
(6,618
)
 
(368
)
 
(6,454
)
 
(6,147
)
Income tax expense
(11,737
)
 
(26,963
)
 
(46,700
)
 
(72,897
)
(Loss) income from discontinued operations (net of tax)
(6,679
)
 
531

 
(68,473
)
 
4,994

Net income attributable to Albemarle Corporation
$
72,794

 
$
90,512

 
$
151,824

 
$
257,238


(a)
For the three months ended September 30, 2014 and 2013, Corporate & other includes $(1.9) million and $1.0 million, respectively, of pension and OPEB plan (costs) credits, and for the nine months ended September 30, 2014 and 2013, Corporate & other includes $(15.7) million and $3.1 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Pension Benefits Cost (Credit):
 
 
 
 
 
 
 
Service cost
$
2,678

 
$
3,488

 
$
8,245

 
$
10,462

Interest cost
8,006

 
7,470

 
24,303

 
22,403

Expected return on assets
(10,027
)
 
(9,848
)
 
(30,404
)
 
(29,541
)
Actuarial loss(a)
2,786

 
—

 
18,218

 
—

Amortization of prior service benefit
(119
)
 
(173
)
 
(530
)
 
(517
)
Total net pension benefits cost
$
3,324

 
$
937

 
$
19,832

 
$
2,807

Postretirement Benefits Cost (Credit):
 
 
 
 
 
 
 
Service cost
$
54

 
$
78

 
$
162

 
$
232

Interest cost
760

 
691

 
2,280

 
2,073

Expected return on assets
(85
)
 
(104
)
 
(256
)
 
(310
)
Amortization of prior service benefit
(24
)
 
(24
)
 
(72
)
 
(72
)
Total net postretirement benefits cost
$
705

 
$
641

 
$
2,114

 
$
1,923

Total net pension and postretirement benefits cost
$
4,029

 
$
1,578

 
$
21,946

 
$
4,730


(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 our U.S. defined benefit plan which covers non-represented employees and our supplemental executive retirement plan (SERP). In connection with the curtailment, we were required to remeasure the related assets and obligations for these two plans. As of the January 31, 2014 remeasurement date, the weighted-average discount rate for all of our domestic pension plans was 4.97% compared to 5.14% at December 31, 2013. 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) of $15.4 million in the first quarter of 2014 related to these two plans.

In connection with the sale of our antioxidant, ibuprofen and propofol businesses and assets to SI Group, Inc. which closed on September 1, 2014, in the third quarter of 2014 we were required to remeasure the assets and obligations of one of our U.S. defined benefit plans for represented employees, which was part of the disposed group. As of the September 1, 2014 remeasurement date, the weighted-average discount rate for all of our domestic pension plans was 4.94% compared to 5.14% at December 31, 2013. Taking into account the discount rate reduction and actual return on plan assets through September 1, 2014, as well as changes to mortality assumptions, we recorded a mark-to-market actuarial loss of $2.8 million in the third quarter of 2014 related to this plan.
During the three-month and nine-month periods ended September 30, 2014, we made contributions of $5.2 million and $7.5 million, respectively, to our qualified and nonqualified pension plans. During the three-month and nine-month periods ended September 30, 2013, we made contributions of $4.8 million and $6.8 million, respectively, to our qualified and nonqualified pension plans. The 2014 amounts include a contribution of $4.3 million to one of our U.S. defined benefit plans for represented employees which was included in the sale of businesses and assets to SI Group, Inc. which closed on September 1, 2014. The participation of the Company as the sponsor, plan administrator and adopting employer of this plan terminated as of September 1, 2014, and the buyer or one of its affiliates adopted and assumed sponsorship and all of the responsibilities and liabilities under the plan pursuant to the terms and provisions of the plan in effect as of the closing date.
We paid $0.8 million and $3.2 million in premiums to the U.S. postretirement benefit plan during the three-month and nine-month periods ended September 30, 2014, respectively. During the three-month and nine-month periods ended September 30, 2013, we paid $0.9 million and $3.1 million, respectively, in premiums to the U.S. postretirement benefit plan.



15
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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.

 
September 30, 2014
 
December 31, 2013
 
Recorded
Amount
 
Fair Value
 
Recorded
Amount
 
Fair Value
 
(In thousands)
Long-term debt
$
1,052,375

 
$
1,079,648

 
$
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 September 30, 2014 and December 31, 2013, we had outstanding foreign currency forward contracts with notional values totaling $177.1 million and $321.4 million, respectively. At September 30, 2014 and December 31, 2013, $0.4 million and $0.2 million, respectively, 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 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 nine-month periods ended September 30, 2014, we recognized (losses) of $(5.6) million and $(8.0) million, respectively, in Other 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 nine-month periods ended September 30, 2013, we recognized gains (losses) of $0.4 million and $(1.8) million, respectively, in Other 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 expenses, net. Also, for the nine-month periods ended September 30, 2014 and 2013, we recorded $8.0 million and $1.8 million, respectively, related to the change in the fair value of our foreign currency forward contracts, and cash settlements of $(8.3) million and $(2.2) 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%, with the cash settlement 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 the swap is settled (October 15, 2014). 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 September 30, 2014, the fair value of our pay fixed, receive variable rate forward starting interest rate swap was a liability of $18.0 million and is included in Accrued expenses. We determined there was no ineffectiveness during the nine-month period ended September 30, 2014, which resulted in the entire change in fair value of this swap being recorded in Accumulated other comprehensive (loss) income. On October 15, 2014, the swap was settled, resulting in a payment to the counterparty of $33.4 million.
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.


16
Table of Contents
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
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 nine-month period ended September 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 September 30, 2014 and December 31, 2013 (in thousands):
 
September 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)
$
21,560

 
$
21,560

 
$
—

 
$
—

Private equity securities(b)
$
1,821

 
$
23

 
$
—

 
$
1,798

Foreign currency forward contracts(d)
$
415

 
$
—

 
$
415

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Obligations under executive deferred compensation plan(a)
$
21,560

 
$
21,560

 
$
—

 
$
—

Interest rate swap contract(c)
$
17,976

 
$
—

 
$
17,976

 
$
—

Foreign currency forward contracts(d)
$
11

 
$
—

 
$
11

 
$
—

 
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 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.

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

(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 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Beginning balance
$
1,822

 
$
—

 
$
750

 
$
—

Total unrealized (losses) gains included in earnings relating to assets still held at the reporting date
(24
)
 
—

 
48

 
—

Purchases
—

 
—

 
1,000

 
—

Ending balance
$
1,798

 
$
—

 
$
1,798

 
$
—


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 nine months ended September 30, 2014 (in thousands):
Beginning balance at December 31, 2013
$
39,104

Workforce reduction charges(a)
1,948

Payments
(30,858
)
Amount reversed to income(b)
(1,466
)
Foreign currency translation
(556
)
Ending balance at September 30, 2014
$
8,172

Amounts reported in Accrued expenses
$
8,172


(a)
These workforce reduction charges are recorded in (Loss) income from discontinued operations (net of tax), in our consolidated statements of income and reflect charges for retention of certain employees associated with our antioxidant, ibuprofen and propofol businesses which were sold effective September 1, 2014.
(b)
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 estimated costs of approximately $14.0 million (recorded in Accrued expenses) for contract termination and volume commitments. Additionally, in the first quarter of 2014 we 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.

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

In the second quarter of 2014 we recorded $3.3 million ($2.1 million after income taxes) in Restructuring and other charges, net, for certain multi-product facility project costs that we do not expect to recover in future periods.

NOTE 14—Accumulated Other Comprehensive (Loss) Income:
The components and activity in Accumulated other comprehensive (loss) income (net of deferred income taxes) consisted of the following during the periods indicated below (in thousands):
 
Foreign
Currency
Translation(a)
 
Pension
and Post-
Retirement
Benefits(b)
 
Unrealized Loss on Interest Rate Swap
 
Other
 
Total
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Balance at June 30, 2014
$
110,681

 
$
19

 
$
(10,421
)
 
$
(635
)
 
$
99,644

Other comprehensive (loss) before reclassifications
(82,568
)
 
—

 
(988
)
 
(1
)
 
(83,557
)
Amounts reclassified from accumulated other comprehensive (loss) income
(17,750
)
 
(147
)
 
—

 
34

 
(17,863
)
Other comprehensive (loss) income, net of tax
(100,318
)
 
(147
)
 
(988
)
 
33

 
(101,420
)
Other comprehensive loss attributable to noncontrolling interests
125

 
—

 
—

 
—

 
125

Balance at September 30, 2014
$
10,488

 
$
(128
)
 
$
(11,409
)
 
$
(602
)
 
$
(1,651
)
Three months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
$
56,378

 
$
585

 
$
—

 
$
(781
)
 
$
56,182

Other comprehensive income before reclassifications
40,613

 
—

 
—

 
4

 
40,617

Amounts reclassified from accumulated other comprehensive (loss) income
—

 
(201
)
 
—

 
34

 
(167
)
Other comprehensive income (loss), net of tax
40,613

 
(201
)
 
—

 
38

 
40,450

Other comprehensive income attributable to noncontrolling interests
(337
)
 
—

 
—

 
—

 
(337
)
Balance at September 30, 2013
$
96,654

 
$
384

 
$
—

 
$
(743
)
 
$
96,295

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
116,465

 
$
487

 
$
—

 
$
(707
)
 
$
116,245

Other comprehensive (loss) income before reclassifications
(88,630
)
 
—

 
(11,409
)
 
2

 
(100,037
)
Amounts reclassified from accumulated other comprehensive (loss) income
(17,750
)
 
(615
)
 
—

 
103

 
(18,262
)
Other comprehensive (loss) income, net of tax
(106,380
)
 
(615
)
 
(11,409
)
 
105

 
(118,299
)
Other comprehensive loss attributable to noncontrolling interests
403

 
—

 
—

 
—

 
403

Balance at September 30, 2014
$
10,488

 
$
(128
)
 
$
(11,409
)
 
$
(602
)
 
$
(1,651
)
Nine months ended September 30, 2013
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
85,117

 
$
989

 
$
—

 
$
(842
)
 
$
85,264

Other comprehensive income (loss) before reclassifications
11,945

 
—

 
—

 
(1
)
 
11,944

Amounts reclassified from accumulated other comprehensive (loss) income
—

 
(605
)
 
—

 
100

 
(505
)
Other comprehensive income (loss), net of tax
11,945

 
(605
)
 
—

 
99

 
11,439

Other comprehensive income attributable to noncontrolling interests
(408
)
 
—

 
—

 
—

 
(408
)
Balance at September 30, 2013
$
96,654

 
$
384

 
$
—

 
$
(743
)
 
$
96,295



19
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ALBEMARLE CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements - (Continued)
(Unaudited)

(a)
Amounts reclassified from accumulated other comprehensive (loss) income for the three-month and nine-month periods ended September 30, 2014 are included in (Loss) income from discontinued operations (net of tax) and resulted from the release of cumulative foreign currency translation adjustments into earnings upon the sale of our antioxidant, ibuprofen and propofol businesses and assets which closed on September 1, 2014.
(b)
Amounts reclassified from accumulated other comprehensive (loss) income consist of amortization of prior service benefit. See Note 10, “Pension Plans and Other Postretirement Benefits.”
The amount of income tax benefit (expense) allocated to each component of Other comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2014 and 2013 is provided in the following (in thousands):
 
Three Months Ended September 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
$
(101,675
)
 
$
(143
)
 
$
(1,556
)
 
$
35

 
$
40,436

 
$
(197
)
 
$
58

Income tax benefit (expense)
1,357

 
(4
)
 
568

 
(2
)
 
177

 
(4
)
 
(20
)
Other comprehensive income (loss), net of tax
$
(100,318
)
 
$
(147
)
 
$
(988
)
 
$
33

 
$
40,613

 
$
(201
)
 
$
38


 
Nine Months Ended September 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
$
(107,011
)
 
$
(602
)
 
$
(17,976
)
 
$
146

 
$
10,654

 
$
(589
)
 
$
159

Income tax benefit (expense)
631

 
(13
)
 
6,567

 
(41
)
 
1,291

 
(16
)
 
(60
)
Other comprehensive income (loss), net of tax
$
(106,380
)
 
$
(615
)
 
$
(11,409
)
 
$
105

 
$
11,945

 
$
(605
)
 
$
99



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. 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. On September 1, 2014, the Company closed the sale of these businesses and assets and received net proceeds of $104.7 million and a receivable of $8.5 million, subject to post-closing adjustments expected to be finalized in the fourth quarter of 2014. Financial results of the disposed group have been presented as discontinued operations in the consolidated statements of income for all periods presented. A summary of results of discontinued operations is as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
38,025

 
$
57,442

 
$
154,273

 
$
169,825

 
 
 
 
 
 
 
 
(Loss) income from discontinued operations
$
(7,752
)
 
$
842

 
$
(90,439
)
 
$
7,013

Income tax (benefit) expense
(1,073
)
 
311

 
(21,966
)
 
2,019

(Loss) income from discontinued operations (net of tax)
$
(6,679
)
 
$
531

 
$
(68,473
)
 
$
4,994

Included in (Loss) income from discontinued operations are pre-tax charges of $80.7 million ($61.0 million after income taxes) recorded in the second quarter of 2014 and $4.8 million ($3.6 million after income taxes) recorded in the third quarter of 2014 related to the loss on the sale of the disposed group, representing the difference between the carrying value of the related

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

assets and their fair value as determined by the sales price less estimated costs to sell. The loss is primarily attributable to goodwill, intangibles and long-lived assets, net of cumulative foreign currency translation gains of $17.8 million.

NOTE 16—Proposed Acquisition of Rockwood:

General
On July 15, 2014, Albemarle and Rockwood entered into the Merger Agreement pursuant to which Albemarle will acquire Rockwood for consideration of $50.65 in cash and 0.4803 of a share of Albemarle common stock per outstanding share of Rockwood common stock. We refer to the transactions contemplated by the Merger Agreement as “the transaction” or “the merger” herein. 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. A special shareholder meeting will be held on November 14, 2014 to vote on the issuance of shares of Albemarle common stock in connection with the transaction. The transaction is also subject to regulatory approvals and other customary closing conditions and is expected to close by the end of the first quarter of 2015.
Financing Related to the Merger
Albemarle expects to fund the aggregate cash portion of the merger consideration using (a) approximately $2.2 billion of cash on hand expected to be available from Albemarle, Rockwood and their respective subsidiaries at the time of closing, and (b) up to $1.7 billion in debt financing from the proceeds of new senior notes to be issued by Albemarle.
Albemarle continues to make progress in finalizing its structure to access the internal cash from Albemarle, Rockwood and their respective subsidiaries to help fund the merger consideration. At this time, Albemarle has not determined its final structure to access such cash and has not finalized any plan to repatriate cash. With regard to this merger structure, Albemarle believes that it is at least reasonably possible that it might utilize cash from foreign operations that, to date, have been asserted as indefinitely invested.
On July 15, 2014, Albemarle entered into a commitment letter (the “Commitment Letter”) with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Commitment Letter provides for the following, if needed:
•
A senior unsecured cash bridge facility in an aggregate principal amount of up to $1.15 billion. Amounts borrowed under the cash bridge facility are intended to be used as short-term borrowings to fund a portion of the cash consideration payable in connection with the merger and pay related fees and expenses, and would mature 60 days following the completion of the merger.
•
A senior unsecured bridge facility in an aggregate principal amount of up to $2.7 billion to be provided if, prior to the date of the completion of the merger, (a) a new senior unsecured term loan in an aggregate principal amount of $1.0 billion is not effective, and (b) up to $1.7 billion in gross proceeds from the issuance and sale of new senior unsecured notes has not been received by Albemarle.
The funding of the bridge facilities is contingent on the satisfaction of customary conditions, including (a) execution and delivery of definitive documentation with respect to such facilities in accordance with the terms sets forth in the Commitment Letter, and (b) consummation of the merger. Structuring and underwriting fees of approximately $15.5 million were paid in the third quarter of 2014 in connection with the bridge facilities, and are reflected in Other, net, in our condensed consolidated statements of cash flows. These costs were capitalized and we expense them over the term of the facilities or until the date at which permanent financing is obtained and the facilities are eliminated. Accordingly, we recorded approximately $6.8 million of expense in the third quarter of 2014, which is reflected in Other expenses, net, in the consolidated statements of income and Other, net in our condensed consolidated statements of cash flows.
On August 15, 2014, Albemarle entered into a term loan credit agreement (the “Term Loan”) providing for a tranche of senior unsecured term loans in an aggregate amount of $1.0 billion in connection with the merger. Amounts borrowed under the Term Loan are intended to be used as short-term borrowings to fund a portion of the cash consideration payable in connection with the merger and pay related fees and expenses. Borrowings bear interest at variable rates based on an average LIBOR for deposits in dollars plus an applicable margin which ranges from 1.125% to 2.500%, depending on Albemarle’s credit rating from S&P and Moody’s. As of the closing of the Term Loan agreement, the applicable margin over LIBOR was 1.125%. Term Loan borrowings will be guaranteed by the subsidiaries of Albemarle that guarantee Rockwood’s existing senior notes due in 2020 or that guarantee the senior unsecured notes that Albemarle expects to issue in connection with the merger. Borrowings are conditioned upon compliance with one financial covenant (the “Maximum Leverage Ratio”) requiring that the Company’s

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

consolidated funded debt, as defined in the agreement, must be less than or equal to 4.50 times consolidated EBITDA, as defined in the agreement, (which reflects adjustments for certain non-recurring or unusual items such as restructuring charges, facility divestiture charges and other significant non-recurring items), or herein “consolidated adjusted EBITDA,” as of the end of any fiscal quarter. The Term Loan matures 364 days following the date of funding, which will occur on the completion of the merger.
On August 15, 2014, the Company amended the February 2014 Credit Agreement. The amendments provide for: (a) an increase in the Company’s Maximum Leverage Ratio from 3.50 to 4.50 for the first four quarters following the completion of the merger, stepping down by 0.25 on a quarterly basis thereafter until reaching 3.50; (b) borrowings of up to $100 million on the date of the completion of the Merger, subject to a reduced set of borrowing conditions; (c) guarantees by the subsidiaries of Albemarle that guarantee Rockwood’s existing senior notes due in 2020 or that guarantee the senior unsecured notes that Albemarle expects to issue in connection with the merger.
Acquisition Costs
Included in Acquisition and integration related costs on our consolidated statements of income for the three-month and nine-month periods ended September 30, 2014 are $9.3 million of acquisition and integration related costs in connection with the proposed acquisition of Rockwood.
Termination Fees
The Merger Agreement contains provisions addressing the circumstances under which Albemarle or Rockwood may terminate the Merger Agreement. In certain circumstances, upon termination of the Merger Agreement, Albemarle or Rockwood will be required to pay a termination fee of $300 million or $180 million, respectively, to the other party. Additionally, if the Merger Agreement is terminated as a result of the failure of Albemarle’s shareholders to approve the issuance of its common stock at the special meeting of shareholders to be held on November 14, 2014, Albemarle must pay Rockwood for up to $25 million of Rockwood’s out-of-pocket fees and expenses. If the Merger Agreement is terminated as a result of the failure of Rockwood’s shareholders to adopt the Merger Agreement at the Rockwood special meeting of shareholders to be held on November 14, 2014, Rockwood must pay Albemarle for up to $25 million of Albemarle’s out-of-pocket fees and expenses. The amount of any expenses paid by either Albemarle or Rockwood to the other party will be credited against any termination fee to be paid by such party if the termination fee subsequently becomes payable.
Pending Litigation Against Albemarle and Rockwood
On July 22, 2014, a putative class action complaint was filed in the Chancery Division of the Superior Court of New Jersey, Mercer County relating to the merger. On July 24, 2014, an additional putative class action complaint was filed in the Chancery Division of the Superior Court of New Jersey, Mercer County relating to the merger. Both suits name the same plaintiff but were filed by different law firms. On August 1, 2014 and August 12, 2014, three additional putative class action complaints were filed in the Court of Chancery of the State of Delaware relating to the merger. The lawsuits filed in New Jersey, Thwaites v. Rockwood Holdings Inc., et al. (Thwaites I), Thwaites v. Rockwood Holdings, Inc., et al. (Thwaites II), and the lawsuits filed in Delaware, Rudman Partners, L.P. v. Rockwood Holdings, Inc., et al., Riley v. Rockwood Holdings, Inc., et al., and North Miami Beach Police Officers & Firefighters’ Retirement Plan v. Rockwood Holdings, Inc., et al., each name Rockwood, its directors and Albemarle as defendants. Thwaites II and the cases filed in Delaware also name Albemarle Holdings Corporation, a wholly-owned subsidiary of Albemarle, as a defendant. The lawsuits, which contain substantially similar allegations, include allegations that the Rockwood board of directors breached their fiduciary duties in connection with the merger by failing to ensure that Rockwood shareholders will receive the maximum value for their shares, failing to conduct an appropriate sale process and putting their own interests ahead of Rockwood shareholders. Rockwood and Albemarle are alleged to have aided and abetted the alleged fiduciary breaches. The lawsuits seek a variety of equitable relief, including enjoining the Rockwood board of directors from proceeding with the proposed merger unless and until they have acted in accordance with their fiduciary duties to maximize shareholder value and rescission of the merger to the extent implemented, in addition to damages arising from the defendants’ alleged breaches and attorneys’ fees and costs. The defendants intend to vigorously defend the lawsuits. On August 12, 2014, the plaintiff in Thwaites I filed a Notice of Voluntary Dismissal Without Prejudice as to all defendants. On August 27, 2014, the Delaware Court of Chancery ordered the three Delaware cases consolidated and appointed co-lead counsel. The court also ordered that no response to the complaints shall be due until after plaintiffs in the cases filed in Delaware file an amended consolidated complaint. Plaintiffs in the cases filed in Delaware have yet to file an amended consolidated complaint. On September 19, 2014, the plaintiff in Thwaites II filed an amended complaint including additional allegations that the registration statement failed to disclose material information.



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

NOTE 17—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 had no impact on our accounting for the sale of our antioxidant, ibuprofen and propofol businesses and assets in 2014.
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 modifies 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 do not expect this new guidance to have a material effect on our consolidated financial statements.
In May 2014, the FASB issued accounting guidance designed to 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 new 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 new 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.


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 37.
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;
•