Albemarle Corporation 2016 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly filing for the three and six months ended June 30, 2016. Albemarle is a global specialty chemicals manufacturer serving refining, energy storage, electronics, construction, automotive, aerospace and other markets. Reportable segments were Lithium and Advanced Materials, Bromine Specialties and Refining Solutions; 2015 results were recast following the 2016 segment reorganization.
On June 17, 2016, Albemarle agreed to sell its Chemetall Surface Treatment business to BASF SE for approximately $3.2 billion in cash, subject to customary adjustments. The business was classified as discontinued operations and held for sale; closing was expected in the fourth quarter of 2016.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $669.3 million | $718.3 million | $1.327 billion | $1.411 billion |
| Gross profit | $248.1 million | $212.0 million | $490.6 million | $403.4 million |
| Gross margin | 37.1% | 29.5% | 37.0% | 28.6% |
| Operating profit | $123.5 million | $79.3 million | $366.3 million | $105.7 million |
| Operating margin | 18.5% | 11.0% | 27.6% | 7.5% |
| Net income from continuing operations | $95.6 million | $49.2 million | $313.8 million | $98.5 million |
| Diluted EPS from continuing operations | $0.74 | $0.37 | $2.61 | $0.79 |
| Net income attributable to Albemarle | $(314.8) million | $52.1 million | $(86.6) million | $95.3 million |
| Adjusted EBITDA | $190.5 million | $181.4 million | $382.5 million | $400.9 million |
Six-month operating cash flow was $252.5 million, compared with $133.2 million in the prior-year period. Capital expenditures were $99.5 million, debt repayments were $382.2 million, and net cash proceeds from divestitures were $310.6 million. Cash and cash equivalents were $193.7 million at June 30, 2016, compared with $213.7 million at December 31, 2015.
Total debt was $3.513 billion, including $493.7 million classified as current and $3.019 billion classified as long term. Commercial paper outstanding was $477.2 million, with a weighted-average interest rate of approximately 1.34% and maturity of 21 days. The company reported $522.8 million of borrowing capacity under its commercial paper program and revolving credit facility, plus $218.0 million under other credit lines. Management stated that debt covenants were satisfied.
The quarterly dividend increased 5% to $0.305 per share. Six-month dividends declared were $0.61 per share.
Material changes versus the prior comparable period
- Reported sales declined 7% in the quarter and 6% year to date, primarily because of the divestiture of the metal sulfides and minerals-based flame retardants and specialty chemicals businesses. Excluding those divestitures, second-quarter sales increased $17.8 million.
- Continuing-operations profitability improved materially. Second-quarter gross profit rose 17%, operating profit rose 56%, and diluted continuing-operations EPS doubled to $0.74.
- Margins benefited from stronger volumes, pricing, cost reductions and the absence of Rockwood purchase-accounting inventory markup charges that reduced 2015 gross profit by $24.2 million in the quarter and $47.6 million year to date.
- Six-month adjusted EBITDA declined 5% despite improvement in the core reportable segments, mainly because of lower contributions from divested businesses and a $53.0 million foreign-currency gain included in 2015 corporate results.
- Lithium and Advanced Materials sales increased 10% in the quarter and 9% year to date; Refining Solutions sales increased 8% in the quarter and 1% year to date. Bromine Specialties sales decreased 8% in the quarter and 2% year to date.
- Interest expense decreased 23% in the quarter and 28% year to date, reflecting lower debt and refinancing completed in October 2015.
Outlook, unusual items and risks
- Management expected continued strong Lithium growth, particularly in battery-grade applications, with continued lithium price improvement.
- Management identified a projected $15 million full-year impact to continuing-operations pretax income and adjusted EBITDA from weakness in curatives and the bankruptcy of a customer.
- Bromine Specialties was expected to face second-half pressure from lower offshore drilling demand, lower flame-retardant volumes, order timing and inventory rebalancing.
- Refining Solutions was expected to benefit from heavy-oil upgrading and improving clean-fuels technology results, although low oil prices could delay refinery catalyst changeouts.
- Management expected 2016 capital expenditures of approximately $230 million and a global effective tax rate of approximately 15.9%, subject to geographic earnings mix and tax-law changes.
- Proceeds from the Chemetall sale were intended for significant deleveraging, investment in growth businesses and shareholder returns. A $416.7 million deferred tax liability was recorded, including a $381.5 million discrete non-cash tax charge and a $35.2 million charge related to foreign earnings reinvestment assertions. The final cash tax obligation and any gain or loss at closing remained subject to transaction adjustments and carrying values.
- Recorded environmental liabilities were $32.8 million; management estimated additional possible environmental remediation costs of up to approximately $17 million before tax.
- Principal risks included global economic weakness, foreign-exchange volatility, raw-material and energy costs, low oil prices, customer and market concentration, chemical manufacturing hazards, environmental and product-liability claims, regulatory changes, cyber and operational events, integration of Rockwood and completion of the Chemetall divestiture.
Facts investors should verify
- Whether the Chemetall transaction closed on expected terms and how final proceeds, tax payments and any closing gain or loss affected leverage.
- The pace of debt reduction, commercial-paper refinancing and compliance with leverage covenants.
- Underlying Lithium demand, pricing and capacity expansion, excluding currency and divestiture effects.
- Whether the projected $15 million curatives/customer impact and Bromine second-half weakness materialized.
- The sustainability of improved continuing-operations margins and adjusted EBITDA, including the effect of non-GAAP adjustments.
- Cash availability, given that approximately $191.7 million of the $193.7 million cash balance was held by foreign subsidiaries.