LTHM Livent Corporation

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________________________________

 FORM 10-Q

_______________________________________________________________________

☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2020

or

☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission File Number 001-38694

__________________________________________________________________________

Registrant’s telephone number, including area code: 215-299-5900

__________________________________________________________________________

(1)During the three months ended June 30, 2020, countries with sales in excess of 10% of combined revenue consisted of Japan and the U.S. Sales for the three months ended June 30, 2020 for Japan and the U.S. totaled $26.6 million and $14.5 million, respectively. During the three months ended June 30, 2019, countries with sales in excess of 10% of combined revenue consisted of Japan, the U.S. and China. Sales for the three months ended June 30, 2019 for Japan, the U.S. and China totaled $43.8 million, $18.1 million and $24.9 million, respectively. During the six months ended June 30, 2020, countries with sales in excess of 10% of combined revenue consisted of Japan and the U.S. Sales for the six months ended June 30, 2020 for Japan and the U.S. totaled $57.7 million and $29.1 million, respectively. During the six months ended June 30, 2019, countries with sales in excess of 10% of combined revenue consisted of Japan, the U.S. and China and totaled $91.8 million, $33.8 million, and $32.9 million, respectively.

For the three months ended June 30, 2020, one customer accounted for approximately 30% of total revenue and our 10 largest customers accounted in aggregate for approximately 64% of revenue. For the three months ended June 30, 2019, one customer accounted for approximately 30% of total revenue and our 10 largest customers accounted in aggregate for approximately 65% of our revenue. For the six months ended June 30, 2020, one customer accounted for approximately 35% of total revenue and our 10 largest customers accounted in aggregate for approximately 64% of revenue. For the six months ended June 30, 2019, two customers accounted for approximately 32% and 10% of total revenue, respectively and our 10 largest customers accounted in aggregate for approximately 58% of our revenue. A loss of any material customer could have a material adverse effect on our business, financial condition and results of operations.

The following table provides information about disaggregated revenue by major product category:

Our lithium products are developed and sold to global and regional customers in the EV, electronics, agrochemicals, pharmaceuticals, polymer and specialty alloy metals market among others. Lithium hydroxide products are used in advanced batteries for all-electric vehicles as well as other products that require portable energy storage such as power tools and military devices. Lithium hydroxide is also sold into grease applications for use in automobiles, aircraft, railcars, agricultural and other types of equipment. Butyllithium products are primarily used as polymer initiators, and in the synthesis of agrochemicals and pharmaceuticals. High purity lithium metal and other specialty compounds include lithium phosphate, pharmaceutical-grade lithium carbonate, high purity lithium chloride and specialty organics. Additionally, we sell whatever lithium carbonate and lithium chloride we do not use internally to our customers for various applications.

Sale of Goods

Revenue from product sales is recognized when (or as) we satisfy a performance obligation by transferring the promised goods to a customer, that is, when control of the good transfers to the customer. The customer is then invoiced at the agreed-upon price with payment terms generally ranging from 30 to 180 days.

In determining when the control of goods is transferred, we typically assess, among other things, the transfer of risk and title and the shipping terms of the contract. The transfer of title and risk typically occurs either upon shipment to the customer or upon receipt by the customer. As such, we typically recognize revenue when goods are shipped based on the relevant incoterm for the product order, or in some regions, when delivery to the customer’s requested destination has occurred. When we perform shipping and handling activities after the transfer of control to the customer (e.g., when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. For FOB shipping point terms, revenue is recognized at the time of shipment since the customer gains control at this point in time.

We record amounts billed for shipping and handling fees as revenue. Costs incurred for shipping and handling are recorded as costs of sales. Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue-producing transactions are presented on a net basis and excluded from revenue in the condensed consolidated statements of operations. We record a liability until remitted to the respective taxing authority.

Contract asset and contract liability balances

We satisfy our obligations by transferring goods and services in exchange for consideration from customers. The timing of performance sometimes differs from the timing the associated consideration is received from the customer, thus resulting in the recognition of a contract liability. We recognize a contract liability if the customer’s payment of consideration is received prior to completion of our related performance obligation.

The following table presents the opening and closing balances of our receivables, net of allowances. As of June 30, 2020 and December 31, 2019, there were no contract liabilities from contract with customers.

(in Millions)			Balance as of June 30, 2020						Balance as of December 31, 2019						Increase (Decrease)
Receivables from contracts with customers, net of allowances			$	55.7					$	90.0					$	(34.3)

The balance of receivables from contracts with customers listed in the table above represents the current trade receivables, net of allowance for doubtful accounts. The allowance for receivables represents our best estimate of the probable losses associated with potential customer defaults. We determine the allowance based on historical experience, current collection trends, and external business factors such as economic factors, including regional bankruptcy rates, and political factors.

Performance obligations

At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promise to transfer a good or service (or bundle of goods or services) that is distinct. To identify the performance obligations, we consider all the goods or services promised in the contract, whether explicitly stated or implied based on customary business practices. Based on our evaluation, we have determined that our current contracts do not contain more than one single performance obligation. Revenue is recognized when (or as) the performance obligation is satisfied, which is when the customer obtains control of the good or service.

Periodically, we may enter into contracts with customers which require them to submit a forecast of non-binding purchase obligations to us. These forecasts are typically provided by the customer to us in good faith, and there are no penalties or obligations if the forecasts are not met. Accordingly, we have determined that these are optional purchases and do not represent material rights and are not considered as unsatisfied (or partially satisfied) performance obligations for the purposes of this disclosure.

Occasionally, we may enter into multi-year take or pay supply agreements with customers. The aggregate amount of revenue expected to be recognized related to these contracts’ performance obligations that are unsatisfied or partially satisfied is approximately $26 million for the remainder of 2020. These approximate revenues do not include amounts of variable consideration attributable to contract renewals or contract contingencies. Based on our past experience with the customers under these arrangements, we expect to continue recognizing revenue in accordance with the contracts as we transfer control of the product to the customer (refer to the sales of goods section for our determination of transfer of control). However, in the case a shortfall of volume purchases occurs, we will recognize the amount payable by the customer over the remaining performance obligations in the contract.

LIVENT CORPORATION

Notes to the Condensed Consolidated Financial Statements (unaudited) — (Continued)

Note 5: Inventories, Net

Inventories consisted of the following:

(in Millions)			June 30, 2020						December 31, 2019
Finished goods			$	46.0					$	45.3
Semi-finished goods			58.2						48.8
Raw materials, supplies and other			12.8						19.3
Inventory, net			$	117.0					$	113.4

(1)  Includes severance costs for management changes at certain operating and administrative facilities and accrued exit costs of $1.0 million for the closing of leased office space.

(2) Represents severance costs and stock-based compensation expense for accelerated vesting related to corporate management changes.

(3) Costs associated with environmental remediation with respect to certain discontinued products. There is one environmental remediation site in Bessemer City, North Carolina.

(4) 2020 consists primarily of legal fees related to IPO securities litigation. See Note 12 for more details.

Roll forward of plant restructuring reserve

In 2017, we began restructuring efforts at our manufacturing site located in Bessemer City, North Carolina. The objective of this restructuring plan is to optimize both the assets and cost structure by reducing certain production lines at the plant. The restructuring decision resulted primarily in shutdown costs. The following table shows a roll forward of restructuring reserve that will result in cash spending. These amounts are included in "Accrued and other current liabilities" on the condensed consolidated balance sheets.

Note 7: Income Taxes

We determine our interim tax provision using an estimated annual effective tax rate methodology (“EAETR”) in accordance with U.S. GAAP. The EAETR is applied to the year-to-date ordinary income, exclusive of discrete items. The tax effects of discrete items are then included to arrive at the total reported interim tax provision.

The determination of the EAETR is based upon a number of estimates, including the estimated annual pretax ordinary income in each tax jurisdiction in which we operate. As our projections of ordinary income change throughout the year, the EAETR will change period-to-period. The tax effects of discrete items are recognized in the tax provision in the period they occur in accordance with U.S. GAAP. Depending on various factors, such as the item’s significance in relation to total income and the rate of tax applicable in the jurisdiction to which it relates, discrete items in any quarter can materially impact the reported effective tax rate. As a global enterprise, our tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors. As a result, there can be significant volatility in interim tax provisions.

Provision for income taxes for the three and six months ended June 30, 2020 was a benefit of $2.0 million and $2.3 million resulting in an effective tax rate of 39.7% and 52.3%, respectively. Provision for income taxes for the three and six months ended June 30, 2019 was $2.6 million and $6.7 million resulting in an effective tax rate of 14.4% and 17.1%, respectively.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act makes the following changes to the U.S. tax code that will affect our 2019 and 2020 taxes, including, but not limited to, (1) temporary modification of the adjusted taxable income limitation under Section 163(j) from 30% to 50% for tax years 2019 and 2020 only; (2) modification to the net operating loss rules surrounding the ability to now carryback five years net operating losses generated in 2018, 2019, and 2020; (3) temporary repeal of the net operating loss taxable income limitation of 80%; and (4) temporary enhancement of corporate charitable contribution limitation to 25% of taxable income for tax year 2020 only. The CARES Act did not have a material impact on the Company's condensed consolidated financial statements.

LIVENT CORPORATION

Notes to the Condensed Consolidated Financial Statements (unaudited) — (Continued)

Note 8: Debt

Long-term debt

Long-term debt consists of the following:

			Interest Rate Percentage																														Maturity Date						June 30, 2020						December 31, 2019
(in Millions)			LIBOR borrowings						Base rate borrowings
Revolving Credit Facility (1)			3.0%						4.3%												2023						$	28.1					$	154.6
4.125% Convertible Senior Notes due 2025 (2)															4.125%						2025						225.0						—
Less transaction costs - 2025 Notes (2)																											(5.5)						—
Discount - 2025 Notes (2)																											(38.9)						—
Total long-term debt (3)																											$	208.7					$	154.6

______________________________

(1)As of June 30, 2020 and December 31, 2019, there were $11.0 million in letters of credit outstanding under our Revolving Credit Facility and $285.9 million and $234.4 million available funds as of June 30, 2020 and December 31, 2019, respectively. Fund availability is subject to the Company meeting its debt covenants.

(2)Does not include amounts related to the Over-Allotment Option which closed on July 7, 2020.

(3)  As of June 30, 2020 and December 31, 2019, the Company had no debt maturing within one year.

4.125% Convertible Senior Notes due 2025

On June 25, 2020, the Company issued $225 million in aggregate principal amount of 4.125% Convertible Senior Notes due in July 2025 (the "2025 Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. We also granted the initial purchasers of the 2025 Notes a 13-day option to purchase up to an additional $33.75 million in aggregate principal amount (the "Over-Allotment Option). On July 7, 2020 we closed on the Over-Allotment Option and issued an additional $20.75 million in aggregate principal amount of 2025 Notes. Total net cash proceeds received including Over-Allotment Option were $238.5 million net of $7.3 million of third-party transaction costs, including initial purchasers' discounts and commissions. The Company used or will use the net proceeds received to finance or refinance eligible green projects designed to align with the provisions of the International Capital Market Association Green Bond Principles 2018, including repaying amounts outstanding under its Revolving Credit Facility.

Each $1,000 of principal of the 2025 Notes is initially convertible into 114.4885 shares of our common stock, which is equivalent to an initial conversion price of $8.73 per share, subject to adjustment upon the occurrence of specified events. We may not redeem the 2025 Notes prior to July 20, 2023. We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after July 20, 2023 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest.

Holders of the 2025 Notes may convert their notes at any time, at their option, on or after January 15, 2025. Further, holders of the 2025 Notes may convert their notes at any time, at their option, prior to January 15, 2025 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each trading day; (2) during the five-business day period after any five-consecutive trading day period in which the trading price per $1,000 principal amount of the 2025 Notes for each trading day of such period is less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day, (3) if we call any or all of the 2020 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date or (4) if specified corporate events occur. Upon conversion, the 2025 Notes will be settled in cash, shares of our common stock or a combination thereof, at our election. If a fundamental change occurs prior to the maturity date, holders of the 2025 Notes may require us to repurchase all or a portion of their 2025 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date or if we deliver a notice of redemption, we will increase

the conversion rate for a holder who elects to convert its 2025 Notes in connection with such an event or notice of redemption in certain circumstances. As of June 30, 2020, none of the conditions permitting the holders of the 2025 Notes to early convert had been met. Therefore, the 2025 Notes are classified as long-term.

In accordance with U.S. GAAP relating to embedded conversion features, we initially valued and bifurcated the conversion feature associated with the 2025 Notes. We recorded a debt discount with a corresponding increase to additional paid-in capital of $42.6 million for the conversion feature, $3.6 million of which was recorded in the third quarter of 2020 relating to the Over-Allotment Option. The resulting debt discount is being amortized to interest expense at an effective interest rate of 8.35% over the five-year term of the 2025 Notes. The Company recognized $0.1 million of interest expense related to the amortization of the discount and $0.2 million of accrued interest expense related to the $225 million principal amount for the last five days of the three and six months ended June 30, 2020. Transaction costs of $1.3 million were allocated to the embedded conversion feature as a reduction of additional paid-in capital, $0.1 million of which was recorded in the third quarter of 2020 related to the Over-Allotment Option. We recognized a deferred tax liability of $8.3 million as a reduction to additional paid-in capital as of June 30, 2020 related to the book and tax basis differences of the debt discount and transaction costs.

The following table summarizes the debt discount and liability and equity allocations of the transaction costs for the original issuance and Over-Allotment Option.

			(a)																		(b)						(a) + (b)
			$225.0 million principal						June Amortization (five days)						As of June 30, 2020						$20.75 million principal Over-Allotment						Total 2025 Notes
(in Millions)
Discount (1)			$	39.0					$	(0.1)					$	38.9					$	3.6					$	42.6
Transaction costs
Liability (2)			$	5.5					$	—					$	5.5					$	0.5					$	6.0
Equity			1.2						—						1.2						0.1						1.3
Total transaction costs			$	6.7					$	—					$	6.7					$	0.6					$	7.3

____________________________

(1)All of the interest related to discount amortization was capitalized for the last five days of the three and six months ended June 30, 2020.

(2)Amortization of transaction costs was less than $0.1 million for the last five days of the three and six months ended June 30, 2020.

Revolving Credit Facility

On September 28, 2018, we entered into a credit agreement among us, our subsidiary, FMC Lithium USA Corp., as borrowers (the “Borrowers”), certain of our wholly owned subsidiaries as guarantors (the "Guarantors"), the lenders party thereto (the “Lenders”), Citibank, N.A., as administrative agent (the "Agent"), and certain other financial institutions party thereto, as joint lead arrangers (the “Original Credit Agreement”, as amended by the First Amendment and Second Amendment (as defined below), the "Credit Agreement"). The Credit Agreement provides for a $400 million senior secured revolving credit facility, $50 million of which is available for the issuance of letters of credit for the account of the Borrowers, with an option, subject to certain conditions and limitations, to increase the aggregate amount of the revolving credit commitments to $600 million (the “Revolving Credit Facility”). The issuance of letters of credit and the proceeds of revolving credit loans made pursuant to the Revolving Credit Facility are available, and will be used, for general corporate purposes, including capital expenditures and permitted acquisitions, of the Borrowers and their subsidiaries.

On May 6, 2020, we entered into the First Amendment to the Credit Agreement (the "First Amendment") with FMC Lithium USA Corp., the Guarantors, the Lenders and the Agent. Among other things, the First Amendment amended and restated the Original Credit Agreement to (i) increase our maximum total net leverage ratio for the fiscal quarters ending June 30, 2020, September 30, 2020 and December 31, 2020 from 3.5 to 6.0, (ii) put a cap of $325 million on our overall borrowings under the Revolving Credit Facility until March 31, 2021, (iii) amend our negative covenant on indebtedness to permit unsecured indebtedness (including convertible debt) up to $350 million, (iv) amend our negative covenants on investments to permit additional investments in Minera del Altiplano S.A., our Argentine subsidiary, (v) restrict our ability to declare or pay cash dividends until March 31, 2021 and (vi) increase the applicable margin on our borrowings by 25 basis points, in each case as described in the First Amendment. We recorded $0.9 million of deferred financing costs in the condensed consolidated balance sheets for First Amendment consent, arrangement and legal fees and a $0.1 million loss on debt extinguishment in the condensed consolidated statements of operations for the write off of existing deferred financing costs to recognize the

temporary reduction in overall borrowing capacity related to the First Amendment. The carrying value of our deferred financing costs was $2.8 million as of June 30, 2020.

The foregoing description of the First Amendment does not purport to be complete and is qualified in its entirety by reference to the First Amendment, including the amended and restated Credit Agreement attached thereto, which is filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

On August 3, 2020, we entered into the Second Amendment to the Credit Agreement (the "Second Amendment") with FMC Lithium USA Corp., the Guarantors, the Lenders and the Agent. The Second Amendment amended the Credit Agreement, as previously amended by the First Amendment, to replace our maximum total net leverage ratio of 6.0 for the fiscal quarters ending September 30, 2020 and December 31, 2020 with a maximum first lien leverage ratio (as defined in the Credit Agreement) of 3.5. The maximum first lien leverage ratio of 3.5 will continue to apply for the fiscal quarter ended March 31, 2021 and for each fiscal quarter thereafter. The first lien leverage ratio as of any date is the ratio of financial covenant debt as of such date secured by a lien on any asset or property of Livent or its restricted subsidiaries on a pari passu or senior basis with the loans and commitments under the Credit Agreement, minus unrestricted cash and cash equivalents on our balance sheet as of such date, to Earnings Before Interest, Taxes, Depreciation and Amortization, as defined in the Credit Agreement, for the last four fiscal quarters ending on or before such date.

The foregoing description of the Second Amendment does not purport to be complete and is qualified in its entirety by reference to the Second Amendment and the Credit Agreement, which Second Amendment is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.

See Note 10, Part II, Item 8 of our 2019 Annual Report on Form 10-K for more information about the credit agreement.

Covenants

The Credit Agreement contains certain affirmative and negative covenants that are binding on the Borrowers and their subsidiaries, including, among others, restrictions (subject to exceptions and qualifications) on the ability of the Borrowers and their subsidiaries to create liens, to undertake fundamental changes, to incur debt, to sell or dispose of assets, to make investments, to make restricted payments such as dividends, distributions or equity repurchases, to change the nature of their businesses, to enter into transactions with affiliates and to enter into certain burdensome agreements. Furthermore, the Borrowers are subject to financial covenants regarding leverage (measured as the ratio of debt to adjusted earnings) and interest coverage (measured as the ratio of adjusted earnings to interest expense). Under the covenants, our maximum allowable total net leverage ratio is 6.0. Our minimum allowable interest coverage ratio is 3.5. We were in compliance with all requirements of the covenants at June 30, 2020.

LIVENT CORPORATION

Notes to the Condensed Consolidated Financial Statements (unaudited) — (Continued)

Note 9: Equity

As of June 30, 2020 and December 31, 2019, we had 2 billion shares of common stock authorized. The following is a summary of Livent's common stock issued and outstanding:

			Issued						Treasury						Outstanding
Balance at December 31, 2019			146,085,696						(104,012)						145,981,684
Adjusted FMC RSU awards (1)			131,648						—						131,648
Livent RSU awards			115,194						—						115,194
Livent stock option awards			27,895						—						27,895
Purchases of treasury stock - deferred compensation plan			—						(4,824)						(4,824)
Balance at June 30, 2020			146,360,433						(108,836)						146,251,597

(1)  See Note 12 to our consolidated and combined financial statements in Part II, Item 8 of our 2019 Annual Report on Form 10-K for more information on Adjusted FMC RSU awards held by FMC employees.

Summarized below is the roll forward of accumulated other comprehensive loss, net of tax.

(1)  See Note 11 for more information.

Reclassifications of accumulated other comprehensive loss

The table below provides details about the reclassifications from accumulated other comprehensive loss and the affected line items in the condensed consolidated statements of operations for the period presented. No amounts were reclassified from accumulated other comprehensive loss for the three and six months ended June 30, 2020.

(1) Provision for income taxes related to the reclassification was less than $0.1 million for the three and six months ended June 30,2019.

Dividends

For the three and six months ended June 30, 2020 and 2019, we paid no dividends. We do not expect to pay any dividends in the foreseeable future.

Note 10: (Loss)/Earnings Per Share

(Loss)/earnings per common share ("EPS") is computed by dividing net (loss)/income by the weighted average number of common shares outstanding during the period on a basic and diluted basis.

Our potentially dilutive securities include potential common shares related to our stock options and restricted stock units ("RSU") granted in connection with the Livent Plan and FMC Plan. See Note 12 to our consolidated and combined financial statements in Part II, Item 8 of our 2019 Annual Report on Form 10-K for more information. Diluted (loss)/earnings per share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock for the period. Because we intend to settle in cash the principal outstanding under our 2025 Notes, we use the treasury stock method when calculating their potential dilutive effect, if any.

(Loss)/earnings applicable to common stock and common stock shares used in the calculation of basic and diluted (loss)/earnings per share are as follows:

Anti-dilutive stock options

For the three and six months ended June 30, 2020, options to purchase 1,832,605 and 1,842,770 shares of our common stock at an average exercise price of $12.36 and $12.47 per share, respectively, were anti-dilutive and not included in the computation of diluted (loss)/earnings per share because the exercise price of the options was greater than the average market price of the common stock for the three and six months ended June 30, 2020. For the three and six months ended June 30, 2019, options to purchase 1,151,312 and 949,697 shares of our common stock at an average exercise price of $14.57 and $15.53 per share, respectively, were anti-dilutive and not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the common stock for the three and six months ended June 30, 2019.

Note 11: Financial Instruments, Risk Management and Fair Value Measurements

Our financial instruments include cash and cash equivalents, trade receivables, other current assets, investments held in trust fund, accounts payable, and amounts included in investments and accruals meeting the definition of financial instruments. Investments in the Livent NQSP deferred compensation plan trust fund are considered Level 1 investments based on readily available quoted prices in active markets for identical assets. The carrying value of cash and cash equivalents, trade receivables, other current assets, and accounts payable approximates their fair value and are considered Level 1 investments. Our other financial instruments include the following:

The estimated fair value of our foreign exchange forward contracts have been determined using standard pricing models which take into account the present value of expected future cash flows discounted to the balance sheet date. These standard pricing models utilize inputs derived from, or corroborated by, observable market data such as interest rate yield curves and currency and commodity spot and forward rates. In addition, we test a subset of our valuations against valuations received from the transaction's counterparty to validate the accuracy of our standard pricing models. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a market exchange at settlement date and do not represent potential gains or losses on these agreements.

The estimated fair value and the carrying amount of debt was $253.1 million and $208.7 million, respectively, as of June 30, 2020. The estimated fair value and carrying amount of debt was $154.6 million as of December 31, 2019.

Use of Derivative Financial Instruments to Manage Risk

We mitigate certain financial exposures connected to currency risk through a program of risk management that includes the use of derivative financial instruments. We enter into foreign exchange forward contracts to reduce the effects of fluctuating foreign currency exchange rates.

We formally document all relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes relating derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also assess both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If we determine that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting with respect to that derivative prospectively.

Foreign Currency Exchange Risk Management

We conduct business in many foreign countries, exposing earnings, cash flows, and our financial position to foreign currency risks. The majority of these risks arise as a result of foreign currency transactions. The primary currencies for which we have exchange rate exposure are the Euro, the British pound, the Chinese yuan, the Argentine peso, and the Japanese yen. We currently do not hedge foreign currency risks associated with the Argentine peso due to the limited availability and the high cost of suitable derivative instruments. Our policy is to minimize exposure to adverse changes in currency exchange rates. This is accomplished through a controlled program of risk management that could include the use of foreign currency debt and forward foreign exchange contracts. We also use forward foreign exchange contracts to hedge firm and highly anticipated foreign currency cash flows, with an objective of balancing currency risk to provide adequate protection from significant fluctuations in the currency markets.

Concentration of Credit Risk

Our counterparties to derivative contracts are primarily major financial institutions. We limit the dollar amount of contracts entered into with any one financial institution and monitor counterparties’ credit ratings. We also enter into master netting agreements with each financial institution, where possible, which helps mitigate the credit risk associated with our financial instruments. While we may be exposed to credit losses due to the nonperformance of counterparties, we consider this risk remote.

Accounting for Derivative Instruments and Hedging Activities

Cash Flow Hedges

We recognize all derivatives on the balance sheet at fair value. On the date we enter into the derivative instrument, we generally designate the derivative as a hedge of the variability of cash flows to be received or paid related to a forecasted transaction (cash flow hedge). We record in Accumulated Other Comprehensive Income ("AOCI") changes in the fair value of derivatives that are designated as and meet all the required criteria for, a cash flow hedge. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. In contrast we immediately record in earnings changes in the fair value of derivatives that are not designated as cash flow hedges.

As of June 30, 2020, we had open foreign currency forward contracts in AOCI in a net after-tax loss position of $0.2 million designated as cash flow hedges of underlying forecasted sales and purchases. At June 30, 2020 we had open forward contracts with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $13.0 million.

Approximately $0.2 million of net after-tax loss, representing open foreign currency exchange contracts, will be realized in earnings during the six months ending December 31, 2020 if spot rates in the future are consistent with market rates as of June 30, 2020. The actual effect on earnings will be dependent on the actual spot rates when the forecasted transactions occur. We recognize derivative gains and losses in the “Costs of sales and services” line in the condensed consolidated statements of income.

Derivatives Not Designated As Cash Flow Hedging Instruments

We hold certain forward contracts that have not been designated as cash flow hedging instruments for accounting purposes. Contracts used to hedge the exposure to foreign currency fluctuations associated with certain monetary assets and liabilities are not designated as cash flow hedging instruments and changes in the fair value of these items are recorded in earnings.

We had open forward contracts not designated as cash flow hedging instruments for accounting purposes with various expiration dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent of approximately $47.4 million at June 30, 2020.

Fair Value of Derivative Instruments

The following tables provide the gross fair value and net balance sheet presentation of our derivative instruments. The Company had no open derivative cash flow hedge contracts in the condensed consolidated balance sheets as of December 31, 2019.

(1) Balance is included in "Accrued and other current liabilities" in the condensed consolidated balance sheets.

        

LIVENT CORPORATION

Notes to the Condensed Consolidated Financial Statements (unaudited) — (Continued)

The following tables summarize the gains or losses related to our cash flow hedges and derivatives not designated as cash flow hedging instruments. For the three months ended March 31, 2020, we did not have any open derivative cash flow hedge contacts.

Derivatives in Cash Flow Hedging Relationships

(in Millions)			Total Foreign Exchange Contracts
Accumulated other comprehensive loss, net of tax at March 31, 2020			$	—
Unrealized hedging losses, net of tax			(0.2)
Total derivative instrument impact on comprehensive income, net of tax			(0.2)
Accumulated other comprehensive loss, net of tax at June 30, 2020			$	(0.2)
Accumulated other comprehensive loss, net of tax at December 31, 2018			$	(1.2)
Unrealized hedging gains, net of tax			0.3
Reclassification of deferred hedging gains, net of tax (1)			(0.4)
Total derivative instrument impact on comprehensive income, net of tax			(0.1)
Accumulated other comprehensive loss, net of tax at March 31, 2019			$	(1.3)
Unrealized hedging gains, net of tax			0.8
Reclassification of deferred hedging gains, net of tax (1)			(0.3)
Total derivative instrument impact on comprehensive income, net of tax			0.5
Accumulated other comprehensive loss, net of tax at June 30, 2019			$	(0.8)

____________________

(1)Amounts are included in “Cost of sales and services” on the condensed consolidated statements of operations.

Derivatives Not Designated as Cash Flow Hedging Instruments

			Location of Loss Recognized in Income on Derivatives			Amount of Pre-tax Loss  Recognized in Income on Derivatives (1)
						Three Months Ended June 30,																		Six Months Ended June 30,
(in Millions)						2020						2019						2020						2019
Foreign Exchange contracts			Cost of Sales and Services			$	(0.3)					$	(0.9)					$	(1.1)					$	(1.0)
Total						$	(0.3)					$	(0.9)					$	(1.1)					$	(1.0)