Albemarle Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals company operating through Lithium, Bromine Specialties and Catalysts, with fine chemistry services reported in All Other. This unaudited filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The results began to reflect COVID-19-related demand and logistics disruption, although management stated that the pandemic had not yet had a material consolidated financial impact through quarter-end.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $738.8 million | $832.1 million | Down 11% |
| Gross profit | $242.0 million | $283.5 million | Down 15% |
| Gross margin | 32.8% | 34.1% | Down 130 basis points |
| Operating profit | $124.0 million | $155.2 million | Down 20% |
| Net income attributable to Albemarle | $107.2 million | $133.6 million | Down 20% |
| Diluted EPS | $1.01 | $1.26 | Down $0.25 |
| Adjusted EBITDA | $196.4 million | $225.9 million | Down 13% |
| Cash flow from operations | $155.1 million | $54.9 million | Up 182% |
Net income margin attributable to Albemarle was 14.5%, compared with 16.1% in the prior-year quarter. The effective tax rate declined to 16.0% from 24.4%, primarily because of the geographic mix of earnings and income from the Jordan Bromine joint venture. Interest and financing expense increased 34% to $16.9 million, largely reflecting higher debt associated with the Wodgina acquisition.
Segment performance
| Segment | Q1 2020 sales | Sales change | Q1 2020 adjusted EBITDA | EBITDA change |
|---|---|---|---|---|
| Lithium | $236.8 million | Down 19% | $78.6 million | Down 32% |
| Bromine Specialties | $231.6 million | Down 7% | $83.3 million | Up 6% |
| Catalysts | $207.2 million | Down 18% | $47.5 million | Down 21% |
| All Other | $63.2 million | Up 60% | $22.8 million | Up 215% |
- Lithium sales declined due to lower volumes, customer inventory levels, current economic conditions and unfavorable pricing in battery- and technology-grade carbonate and hydroxide. The company idled Wodgina spodumene production until market conditions support production economics.
- Bromine Specialties experienced lower volume from logistics challenges, but improved pricing, mix and lower production and raw-material costs increased adjusted EBITDA.
- Catalysts was affected by lower transportation-fuel demand associated with stay-at-home orders and travel restrictions in Asia, partly offset by lower metal costs and favorable pricing and mix.
- All Other benefited from higher fine chemistry services volume.
Cash flow, liquidity and debt
- Operating cash flow was $155.1 million. Capital expenditures were $214.5 million, acquisitions used $22.6 million, and net cash used in investing activities was $234.9 million.
- Cash and cash equivalents were $553.2 million at March 31, 2020, down from $613.1 million at December 31, 2019. Approximately $429.6 million was held by foreign subsidiaries.
- Total long-term debt was $3.14 billion, including $250.0 million drawn under the revolving credit facility, compared with $3.05 billion at year-end 2019. The current portion was $35.6 million, primarily commercial paper.
- The company had approximately $915.0 million of availability under its commercial paper program and credit agreements, plus $189.6 million under other lines of credit, subject to covenants.
- In April 2020, the company borrowed the remaining $200.0 million under its 2019 Credit Facility for general corporate purposes.
- Management forecast 2020 capital expenditures of approximately $850 million to $950 million, reflecting delays to selected projects to preserve financial flexibility.
- The quarterly dividend was increased 5% to $0.385 per share. A dividend at that rate was declared for the second quarter of 2020.
Material changes versus the prior comparable period
- Sales, gross profit, operating profit, net income attributable to Albemarle and adjusted EBITDA declined, driven primarily by lower volumes across the reportable segments and Lithium pricing pressure.
- Gross margin narrowed by 130 basis points, while SG&A declined 10% due to lower professional and administrative costs and cost-saving initiatives.
- Cash flow from operations improved substantially because of working-capital inflows, despite lower cash earnings in Lithium and Catalysts.
- Other comprehensive loss increased to $130.7 million from $6.9 million, primarily from foreign-currency translation losses and a $51.5 million after-tax cash-flow hedge loss.
- The company completed the acquisition of a 60% interest in the Wodgina lithium project in October 2019; the project generated a $4.7 million loss attributable to Albemarle during Q1 2020 and had no net sales.
- Chief Executive Officer Luke Kissam announced his retirement for health reasons. J. Kent Masters became Chairman, President and Chief Executive Officer effective April 20, 2020, with Mr. Kissam remaining in an advisory role through June 2020.
Guidance, outlook, risks and unusual items
- Management expected Lithium results to decline year over year in 2020 because of pricing pressure and limited new capacity, partly offset by productivity improvements. Global electric-vehicle production had slowed, increasing uncertainty for lithium demand.
- Management expected Bromine Specialties sales and profitability to decline because of lower average selling prices, logistics issues and anticipated COVID-19-related demand weakness, particularly in the second half of 2020.
- Management expected Catalysts sales and profitability to decline because of lower fuel demand, travel restrictions and potential customer capital-spending reductions. The timing of any recovery remained uncertain.
- All operating sites were reported to be operating at normal capacity at the time of filing, but government shutdowns could affect materials, supply chains and customer purchases.
- The company delayed certain capital projects and accelerated cost savings to preserve liquidity. Potential divestiture processes for PCS and fine chemistry services were temporarily delayed by COVID-19 travel restrictions.
- On May 11, 2020, the company amended its credit agreements. The covenant changed to consolidated net funded debt to consolidated EBITDA, with maximum ratios of 4.00:1 for Q2 2020, 4.50:1 through Q3 2021, 4.00:1 for Q4 2021 and 3.50:1 thereafter. Management stated it was compliant as of March 31, 2020 and expected compliance for at least one year from issuance.
- If COVID-19 causes earnings and operating cash flow to deteriorate beyond current expectations, the company may fail to comply with amended covenants. Failure to obtain further amendments could trigger default and potential acceleration of debt.
- Recorded environmental liabilities totaled $41.7 million, with estimated additional possible remediation costs of $10 million to $30 million before tax. The company also continued cooperating with DOJ, SEC and Dutch authorities regarding a self-reported investigation into potential improper payments involving third-party sales representatives; the duration, outcome and costs were not determinable.
- Unusual Q1 2020 items included $1.8 million of restructuring costs, $3.0 million of acquisition and integration costs and a $2.6 million legal-settlement gain partly offset by a $0.8 million indemnification adjustment.
Important facts for investors to verify
- Whether COVID-19-driven reductions in automotive, transportation-fuel and industrial demand materially affected subsequent quarters beyond the limited Q1 impact.
- Progress and economics of the Wodgina project, including the timing of any production restart and the potential for impairment of acquired mineral rights or goodwill.
- Compliance with the amended net debt-to-EBITDA covenants and the company’s ability to refinance or repay debt as facilities mature.
- Actual 2020 capital expenditures versus the $850 million to $950 million forecast and the effect of project delays on growth capacity.
- Changes in Lithium pricing, customer inventories, electric-vehicle demand and long-term supply agreements.
- Developments in the DOJ, SEC and Dutch Prosecutor investigations, environmental remediation exposure and potential penalties or related costs.
- Cash availability in the United States versus foreign subsidiaries, particularly if operating cash flow weakens or credit-market access becomes more constrained.