ALBEMARLE CORP quarterly report, Q1 FY2015

Albemarle Corporation: First-Quarter 2015 Form 10-Q Summary

Business context and reporting period

Albemarle is a global specialty chemicals producer serving lithium, bromine, petroleum refining, surface treatment, energy storage, automotive, aerospace and other markets. The filing covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014. The financial statements are unaudited.

The January 12, 2015 acquisition of Rockwood Holdings materially changed the company’s scale, segment structure, asset base, debt profile and reported results. Rockwood results are included beginning January 13, 2015.

Key financial metrics

Metric	Q1 2015	Q1 2014	Change
Net sales	$884.4 million	$599.8 million	+47%
Gross profit	$258.5 million	$195.6 million	+32%
Gross margin	29.2%	32.6%	Down 3.4 points
Operating profit	$36.7 million	$77.9 million	-53%
Operating margin	4.1%	13.0%	Down 8.9 points
Net income attributable to Albemarle	$43.1 million	$56.6 million	-24%
Diluted EPS from continuing operations	$0.40	$0.73	-45%
Cash flow from operations	$45.8 million	$149.2 million	-69%
Adjusted EBITDA	$265.6 million	$136.0 million	+95%

Income from continuing operations was $47.1 million, compared with $66.0 million in the prior-year quarter. The effective tax rate increased to 27.8% from 18.8%. Other income included $52.4 million of foreign currency transaction gains, primarily related to U.S. dollar cash held by euro-functional foreign subsidiaries. Equity income from unconsolidated investments increased to $10.4 million from $8.9 million.

Other comprehensive loss was $300.0 million, primarily reflecting $354.6 million of unfavorable foreign currency translation, partly offset by a $54.0 million after-tax gain on the euro-denominated net investment hedge. Comprehensive loss attributable to Albemarle was $256.8 million.

Balance sheet, debt and liquidity

Cash and cash equivalents were $261.4 million at March 31, 2015, down from $2.490 billion at December 31, 2014.
Total debt was $4.013 billion, including $471.8 million classified as current and $3.541 billion classified as long-term, compared with total debt of $2.934 billion at year-end 2014.
Rockwood’s $1.25 billion aggregate principal amount of 4.625% senior notes was assumed in the acquisition; the notes mature October 15, 2020.
Commercial paper outstanding was $461.7 million, with a weighted-average interest rate of approximately 0.87% and weighted-average maturity of 21 days.
The company reported availability of $538.3 million under its commercial paper program and revolving credit agreement, plus $156.0 million under other credit lines, subject to covenants.
Management stated that the company was in compliance with its debt covenants and expects cash on hand, operating cash flow and borrowings to fund operations, debt service, capital expenditures, pension contributions and dividends.
Capital expenditures were $56.7 million in the quarter; management expected approximately $235 million of capital expenditures for 2015.

Material changes versus the prior comparable period

Rockwood contributed approximately $328.8 million of sales and $8.9 million of net income attributable to Albemarle during the post-closing period.
Acquisition and integration costs were $59.5 million, including $57.4 million directly related to Rockwood. Management estimated additional Rockwood-related costs of approximately $143 million through 2016.
Rockwood purchase accounting created approximately $2.6 billion of goodwill and $1.956 billion of acquired gross intangible assets. Acquired inventory fair-value step-up utilization reduced earnings by approximately $48.2 million, including $40.3 million in cost of goods sold and $7.9 million in equity income.
SG&A increased 74% to $135.8 million, primarily because of Rockwood. R&D increased 17% to $26.5 million.
Interest and financing expense increased to $35.7 million from $8.8 million due to acquisition-related borrowings.
The prior-year quarter included $17.0 million of restructuring and other charges and a $1.8 million after-tax loss from discontinued operations; neither item was recorded in Q1 2015.
Reported sales excluding Rockwood declined by approximately $44.1 million, primarily from $23.1 million of unfavorable currency translation and $18.8 million of unfavorable pricing and mix impacts.
Performance Chemicals sales increased 41% and adjusted EBITDA increased 78%. Refining Solutions sales declined 8% and adjusted EBITDA declined 31%. Chemetall Surface Treatment contributed $192.1 million of sales and $46.0 million of adjusted EBITDA.
The company announced plans to pursue strategic alternatives for Minerals, Fine Chemistry Services and Metal Sulfides, with anticipated proceeds intended to reduce acquisition debt.

Guidance, outlook, commentary and risks

Management expected 2015 Performance Chemicals sales to be broadly comparable with the prior year, while targeting healthy margins through bromine portfolio management and lithium growth.
Management expected continued long-term growth in Refining Solutions but identified near-term risks from lower oil prices, crude slate changes, fewer first-fill opportunities, product mix and currency effects.
Management expected Chemetall Surface Treatment to grow in 2015 despite the stronger U.S. dollar, supported by customer relationships, product development, process improvements and acquisitions.
The company’s stated priorities were increasing sales volumes, deleveraging following Rockwood, portfolio optimization, pricing and product development, cost management and customer value creation.
Management projected a 2015 global effective tax rate of approximately 20.6%, subject to geographic earnings mix and tax-law changes.
Key risks include integration and synergy execution, acquisition-related leverage, foreign exchange volatility, lower oil prices, pricing pressure in bromine derivatives, raw-material and energy costs, customer demand, regulatory and environmental obligations, litigation, interest rates, access to capital markets and chemical manufacturing hazards.
Rockwood merger litigation was preliminarily settled subject to final court approval. A separate appraisal action involving approximately 882,000 Rockwood shares remained pending; the company recorded an estimated $74.9 million liability.
Recorded environmental liabilities were $37.3 million, with management estimating possible additional remediation costs of up to approximately $22 million before tax.
Off-balance-sheet bank guarantees and letters of credit totaled approximately $43.8 million. Total contractual obligations were $773.5 million for the remainder of 2015 and $4.0 billion thereafter.

Most important facts for an investor to verify

Whether Rockwood integration delivers the expected synergies and whether the anticipated additional $143 million of integration costs materially affect earnings and cash flow.
The pace of deleveraging, commercial paper refinancing and compliance with the company’s leverage covenant.
Whether cash generation improves from the Q1 operating cash flow level of $45.8 million.
The sustainability of segment margins given currency movements, oil prices, pricing pressure and acquired inventory step-up charges.
The final Rockwood purchase-price allocation, including goodwill, intangible values, deferred taxes and pension obligations.
The outcome of the Rockwood appraisal proceeding and final approval of the merger-related settlement.
Potential additional environmental, pension, tax and other contingencies, including the disclosed $22 million possible additional environmental exposure.
Progress on strategic alternatives for the All Other businesses and the amount of proceeds ultimately applied to debt reduction.