Albemarle Corporation: FY2017 Form 10-K Summary
Business context and reporting period
Albemarle Corporation is a global specialty chemicals producer serving energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection and other markets. The filing covers the fiscal year ended December 31, 2017, with comparative results for 2016 and 2015. Reportable segments were Lithium and Advanced Materials, Bromine Specialties and Refining Solutions. In the first quarter of 2018, Performance Catalyst Solutions was planned to merge with Refining Solutions to create the Catalysts segment.
The company operated 31 production and research facilities, served approximately 2,500 customers in approximately 100 countries, and generated approximately 73% of sales outside the United States.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $3.072 billion | $2.677 billion | Up 15% |
| Gross profit | $1.110 billion | $970.6 million | Up 14% |
| Gross margin | 36.1% | 36.3% | Down 0.2 points |
| Operating profit | $587.7 million | $574.6 million | Up 2% |
| Operating margin | 19.1% | 21.5% | Down 2.4 points |
| Net income from continuing operations | $99.5 million | $478.6 million | Down 79% |
| Net income attributable to Albemarle | $54.9 million | $643.7 million | Down 91% |
| Diluted EPS from continuing operations | $0.49 | $3.90 | Down 87% |
| Adjusted EBITDA | $885.5 million | $758.2 million | Up 17% |
| Cash flow from operations | $304.0 million | $735.5 million | Down 59% |
Reported earnings were heavily affected by the Tax Cuts and Jobs Act. Albemarle recorded a provisional $429.2 million one-time transition tax expense, partially offset by a $62.3 million deferred-tax benefit from remeasuring deferred tax balances. The resulting effective tax rate was 96.6%, compared with 18.7% in 2016.
Adjusted EBITDA increased primarily because of higher lithium pricing and volumes. Segment adjusted EBITDA was $518.5 million for Lithium and Advanced Materials, $258.9 million for Bromine Specialties and $212.0 million for Refining Solutions. Refining Solutions EBITDA declined 11% because of unfavorable pricing and mix, higher costs and hurricane-related impacts.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $1.137 billion at December 31, 2017, compared with $2.270 billion at December 31, 2016.
- Operating cash flow declined primarily because the company paid approximately $257 million of taxes related to the 2016 Chemetall sale and increased lithium inventories.
- Capital expenditures were $317.7 million, including significant lithium expansion spending. Management expected 2018 capital expenditures of approximately $800 million to $900 million, primarily for lithium growth and capacity expansion.
- Total debt was $1.837 billion, including $421.3 million of commercial paper. Noncurrent debt was $1.415 billion, down from $2.122 billion in 2016.
- No borrowings were outstanding under the $1.0 billion revolving credit facility at year-end. The company reported approximately $578.7 million of availability under its commercial paper program and revolving facility, subject to covenants.
- Management stated that the company was in compliance with debt covenants and expected cash on hand, operating cash flow, divestiture proceeds and borrowings to fund operations, debt service, capital expenditures, dividends and other planned uses.
- Albemarle completed a $250 million accelerated share repurchase, retiring 2.34 million shares, and paid $140.6 million of dividends to shareholders during 2017.
Material changes versus the prior comparable period
- Net sales rose 15%, driven by $272.2 million of higher volumes and $157.8 million of favorable pricing, with lithium as the principal growth driver.
- Lithium and Advanced Materials sales increased 35% to $1.308 billion; lithium sales benefited from battery-grade demand and price increases.
- Bromine Specialties sales increased 8% to $855.1 million, with strong fire-safety and derivative volumes.
- Refining Solutions sales increased 6% to $778.3 million, but adjusted EBITDA fell 11% because of unfavorable pricing and product mix, higher costs and hurricane Harvey effects.
- Gross margin remained broadly stable on a reported basis. Excluding specified acquisition, inventory-markup and restructuring charges, management reported a 37.4% 2017 gross margin versus 36.7% in 2016.
- The company repaid the 3.00% senior notes, €307.0 million of 1.875% senior notes and $174.7 million of 4.50% senior notes. The repayments generated a $52.8 million loss on early extinguishment of debt.
- The company signed an agreement to sell the polyolefin catalysts and components portion of PCS to W.R. Grace for approximately $416 million in cash. The transaction was expected to close in the first quarter of 2018 and was classified as held for sale at year-end.
- 2016 results included significant gains from divestitures, including the Chemetall Surface Treatment sale. Those gains did not recur in 2017, making reported year-over-year earnings comparisons less representative of underlying operating performance.
Guidance, outlook, risks and unusual items
Management expected continued strong 2018 lithium growth from battery-grade demand, price improvement and increased conversion capacity. It expected PCS profitability to stabilize, Bromine Specialties growth and profitability to remain relatively flat, and Refining Solutions to face continued raw-material cost pressure. Management projected a 2018 global effective tax rate of approximately 23% to 24%, subject to changes in the geographic mix of earnings and tax legislation.
Key unusual items included the $429.2 million transition tax, the $52.8 million debt-extinguishment loss, $33.9 million of acquisition and integration costs, $17.1 million of restructuring and other costs, a $28.7 million reserve against a note receivable, and a $23.1 million inventory-markup charge related to the Jiangli New Materials acquisition. Fourth-quarter pension and OPEB actuarial gains contributed $7.3 million after tax.
The company voluntarily self-reported potential improper payments involving third-party sales representatives in Refining Solutions to the Department of Justice and SEC. The duration, scope, outcome and costs of the investigations were uncertain. The company implemented remedial measures and stated that it could not predict potential fines, penalties, disgorgement or other actions.
Other material risks include lithium quota and permitting matters in Chile, commodity and raw-material price volatility, dependence on international operations and foreign currencies, cyclical refining and electronics markets, environmental and product-liability exposure, regulatory restrictions on chemicals and brominated flame retardants, cybersecurity, joint-venture performance, pension funding, debt refinancing and the execution of substantial lithium capacity investments.
Environmental liabilities totaled approximately $39.8 million at year-end, with management estimating that additional remediation costs could be up to approximately $18 million before tax. Off-balance-sheet bank guarantees and letters of credit totaled approximately $63.5 million.
Important facts for investors to verify
- Reconcile reported earnings with adjusted EBITDA and isolate the effects of the TCJA transition tax, debt extinguishment, restructuring, acquisition costs and pension mark-to-market gains.
- Verify the sustainability of lithium pricing, battery-grade volumes, capacity expansions and Chilean CORFO quota approvals.
- Track the closing and accounting gain from the approximately $416 million PCS divestiture and the 2018 segment reorganization.
- Assess whether operating cash flow can support the planned $800 million to $900 million of 2018 capital expenditures while maintaining dividends, debt service and share repurchases.
- Review commercial paper refinancing needs, debt maturities, interest-rate exposure and compliance with the 3.50-times adjusted EBITDA leverage covenant.
- Monitor the DOJ and SEC review of potential improper payments, related clawback arrangements and any resulting penalties or remedial costs.
- Evaluate environmental, tax, pension, product-liability and other contingent obligations, including the company’s estimates of potential unrecorded remediation costs.
- Confirm the provisional nature of certain TCJA accounting estimates, including transition-tax calculations, GILTI treatment and indefinite-reinvestment assertions.