Albemarle Corporation — Q1 2016 Form 10-Q Summary
Business Context and Reporting Period
Albemarle is a global specialty chemicals manufacturer serving lithium and advanced materials, bromine specialties, refining solutions, surface treatment, and other markets. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Effective January 1, 2016, the former Performance Chemicals segment was divided into Lithium and Advanced Materials and Bromine Specialties. Prior-period segment results were recast. The company also completed the divestiture of its metal sulfides business and its minerals-based flame retardants and specialty chemicals businesses during the quarter.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $865.4 million | $884.4 million | Down 2% |
| Gross profit | $337.4 million | $258.5 million | Up 31% |
| Gross margin | 39.0% | 29.2% | Up 980 basis points |
| Operating profit | $274.8 million | $36.7 million | Up 649% |
| Operating margin | 31.8% | 4.1% | Up 2,770 basis points |
| Net income attributable to Albemarle | $228.2 million | $43.1 million | Up 429% |
| Diluted EPS | $2.02 | $0.40 | Up 405% |
| Adjusted EBITDA | $245.0 million | $265.6 million | Down 8% |
| Cash flow from operations | $172.7 million | $45.8 million | Up $126.9 million |
Reported earnings benefited materially from a $121.3 million pretax net gain on business sales, substantially lower acquisition and integration costs, reduced inventory-markup charges related to the Rockwood acquisition, lower interest expense, and a lower effective tax rate. Excluding the business-sale gain and the prior-year inventory-markup and related unusual items, management reported a $15.7 million increase in net income attributable to Albemarle.
Segment net sales and adjusted EBITDA were:
| Segment | Net sales | Sales change | Adjusted EBITDA | EBITDA change |
|---|---|---|---|---|
| Lithium and Advanced Materials | $216.2 million | Up 9% | $86.5 million | Up 11% |
| Bromine Specialties | $196.6 million | Up 4% | $61.6 million | Up 16% |
| Refining Solutions | $170.6 million | Down 5% | $55.1 million | Up 31% |
| Chemetall Surface Treatment | $208.2 million | Up 8% | $52.5 million | Up 14% |
| All Other | $72.1 million | Down 41% | $8.5 million | Down 38% |
Cash Flow, Debt, Liquidity, and Capital Resources
- Cash and cash equivalents increased to $252.4 million at March 31, 2016, from $213.7 million at December 31, 2015. Approximately $237.7 million was held by foreign subsidiaries.
- Operating cash flow was $172.7 million. Investing activities provided $168.2 million, primarily from $307.2 million of divestiture proceeds, partially offset by $58.1 million of capital expenditures and $82.0 million of acquisition-related and other cash payments.
- Financing activities used $297.3 million, including $331.6 million of long-term debt repayments and $32.5 million of dividends paid.
- Total long-term debt was $3.6 billion, including $484.8 million due within one year. Noncurrent debt was $3.1 billion, compared with $3.2 billion at December 31, 2015.
- Commercial paper outstanding was $478.1 million, with a weighted-average interest rate of approximately 1.31% and weighted-average maturity of 21 days.
- The company had no borrowings under its $1.0 billion revolving credit agreement and reported approximately $521.9 million of borrowing capacity under the commercial paper program and revolving facility, plus $215.4 million under other lines of credit, subject to covenants.
- Management stated that the company was in compliance with its debt covenants and expected cash on hand, operating cash flow, and borrowing capacity to fund operations, debt service, capital expenditures, pension contributions, dividends, and potential share repurchases.
- Capital expenditures are expected to approximate $230 million in 2016. Additional Rockwood integration costs of approximately $40 million were expected through 2016.
Material Changes Versus the Prior Comparable Period
- Revenue declined 2%, but revenue excluding the divested businesses increased by $35.3 million, reflecting higher volumes and pricing partly offset by unfavorable currency effects.
- Gross profit increased primarily because of stronger volumes, favorable pricing, $15.5 million of lower variable and fixed costs, and a reduction in Rockwood inventory-markup charges from $40.3 million to $0.2 million.
- Acquisition and integration costs declined to $21.4 million from $59.5 million.
- Interest and financing expense declined to $25.3 million from $35.7 million, primarily because of lower debt and refinancing benefits.
- Other income declined sharply to $0.4 million from $50.0 million because Q1 2015 included $52.4 million of favorable foreign-currency translation gains.
- The effective tax rate declined to 12.4% from 27.8%, principally due to the geographic mix of earnings and the tax impact of business-sale gains.
- Other comprehensive income was $89.9 million versus a $300.0 million loss in Q1 2015, largely due to favorable foreign-currency translation.
Guidance, Outlook, Risks, and Unusual Items
Management described business fundamentals as sound and emphasized deleveraging, cost control, pricing, product development, and realization of Rockwood synergies. The company expected to exceed its initial Rockwood synergy expectations and forecast a 2016 global effective tax rate of approximately 20.2%.
- Lithium and Advanced Materials: Continued strong growth was expected, led by battery-grade applications and lithium pricing. A customer bankruptcy could reduce 2016 pretax income and adjusted EBITDA by as much as $10 million.
- Bromine Specialties: The outlook remained challenging because of lower demand for clear brine fluids tied to offshore drilling and the expiration of a methyl bromide supply agreement.
- Refining Solutions: Lower oil prices could delay catalyst change-outs and affect crude slates, although heavy-oil upgrading demand and longer-term fuel-quality requirements were viewed positively.
- Chemetall Surface Treatment: Continued growth was expected from customer demand, product development, geographic expansion, and acquisitions.
- Fine chemistry services: In April 2016, the company discontinued efforts to sell this business and expected to account for it as held and used beginning in Q2 2016.
- Environmental liabilities totaled $36.7 million at March 31, 2016. Management estimated that additional environmental remediation costs could be up to approximately $15 million before tax, although the company did not expect a material annual consolidated impact.
- Off-balance-sheet arrangements, including bank guarantees and letters of credit, totaled approximately $54.8 million.
- Key risks include global economic weakness, customer demand and order timing, raw-material and energy costs, foreign-currency volatility, lower oil prices, regulation, environmental and product liability, cybersecurity, execution of acquisitions and divestitures, and access to debt markets.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $121.3 million pretax divestiture gain and other acquisition-related accounting adjustments.
- Reconcile adjusted EBITDA to GAAP net income and assess the effect of corporate costs, currency movements, and divested operations.
- Monitor lithium pricing and volumes, the identified customer-bankruptcy exposure, and the sustainability of segment EBITDA gains.
- Track debt reduction, commercial-paper refinancing needs, leverage-covenant compliance, and the concentration of cash held outside the United States.
- Verify the expected $230 million of 2016 capital expenditures and approximately $40 million of remaining Rockwood integration costs.
- Assess the effect of the fine chemistry services business being reclassified from held for sale to held and used in Q2 2016.
- Review environmental, litigation, indemnification, pension, uncertain-tax-position, and foreign-exchange exposures, including the estimated $15 million of potential additional environmental costs.