Albemarle Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer serving petroleum refining, fire safety, plastics, electronics, pharmaceuticals, agriculture and other markets. The filing covers the three months ended March 31, 2014, with comparisons to the first quarter of 2013. Effective January 1, 2014, the company reorganized into Performance Chemicals and Catalyst Solutions.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $656.7 million | $641.6 million | 2% |
| Gross profit | $194.3 million | $199.6 million | (3)% |
| Gross margin | 29.6% | 31.1% | Down 150 bps |
| Operating profit | $75.4 million | $114.9 million | (34)% |
| Operating margin | 11.5% | 17.9% | Down 640 bps |
| Net income attributable to Albemarle | $56.6 million | $84.0 million | (33)% |
| Diluted EPS | $0.71 | $0.94 | (24)% |
| Cash flow from operations | $149.2 million | $98.7 million | 51% |
Performance Chemicals sales were $360.5 million, essentially flat year over year, while segment income declined 11% to $71.2 million. Catalyst Solutions sales increased 6% to $296.1 million and segment income increased 4% to $57.2 million. The consolidated effective tax rate declined to 18.4% from 24.8%.
Cash and cash equivalents were $524.0 million at March 31, 2014, compared with $477.2 million at December 31, 2013. Capital expenditures were $23.7 million, dividends paid were $19.6 million and share repurchases totaled $50.0 million. Total debt was approximately $1.07 billion, including $363.0 million of commercial paper. The company had no borrowings outstanding under its new $750.0 million revolving credit facility and reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales grew modestly because favorable volumes of approximately 3% more than offset unfavorable pricing, principally in Performance Chemicals.
- Gross profit declined due to higher manufacturing and utility costs and unfavorable pricing. SG&A increased 22%, primarily because of pension and other postretirement benefit costs, including a $15.4 million actuarial loss.
- The company recorded $17.0 million of restructuring and other charges, consisting primarily of approximately $14.0 million of aluminum alkyl contract termination and volume commitment costs and a $3.0 million impairment charge.
- Equity income from unconsolidated investments declined 13% to $8.9 million, while income attributable to noncontrolling interests increased to $7.7 million.
- The quarterly dividend increased 15% to $0.275 per share. The company repurchased 623,248 shares under an accelerated share repurchase agreement for $50.0 million.
- Operating segments were realigned, and prior-period segment information was recast for comparability.
Guidance, outlook, risks and unusual items
Management expects 2014 capital expenditures of approximately $100 million to $125 million and a global effective tax rate of approximately 23.9%, subject to geographic earnings mix and tax-law changes. Management expects cash on hand, operating cash flow and borrowing capacity to fund operations, debt service, capital expenditures, pension contributions, dividends and planned repurchases.
Management described Performance Chemicals as facing soft demand, cautious customer inventories and pricing pressure, although brominated flame-retardant pricing appeared to be stabilizing. Catalyst Solutions benefited from stronger volumes but continued to incur costs associated with recently added capacity. The aluminum alkyl capacity reduction is expected to produce annual savings of up to $3 million beginning within two years.
- A workforce reduction plan involving approximately 230 employees was initiated in late 2013; approximately $17.8 million of related payments remained at March 31, 2014.
- The company signed an agreement on April 15, 2014 to sell its antioxidant, ibuprofen and propofol businesses and related assets to SI Group for undisclosed cash consideration. Beginning in the second quarter, the assets will be classified as held for sale, and management expects a preliminary noncash charge of $50 million to $120 million.
- The company has $325.0 million of senior notes maturing February 1, 2015 and intends to refinance them. A $325.0 million forward-starting interest-rate swap was entered into for this purpose; its March 31 fair value was a $6.3 million liability.
- Recorded environmental liabilities were $15.3 million, with estimated additional remediation exposure of up to approximately $17 million before tax. The company does not expect the additional exposure to have a material annual consolidated effect, although individual quarters could be affected.
- An EPA lawsuit concerning alleged regulatory violations at the Orangeburg, South Carolina facility remains unresolved. The financial impact cannot be predicted with certainty, although management does not expect a material adverse effect.
- Forward-looking risks include economic and end-market conditions, customer demand and order timing, pricing and raw-material costs, foreign exchange, regulation, litigation, environmental matters, pension performance, interest rates, financing-market volatility, acquisitions and divestitures, and manufacturing or supply disruptions.
Investor verification checklist
- Verify the final noncash impairment or other charge from the SI Group asset sale and the transaction’s closing terms.
- Monitor refinancing of the $325 million senior notes due in 2015 and the effect of the interest-rate swap.
- Assess whether Performance Chemicals pricing stabilizes and whether Catalyst Solutions capacity reaches targeted utilization.
- Reconcile reported earnings with the pension actuarial loss, aluminum alkyl restructuring charges and other unusual items.
- Review the company’s ability to maintain cash generation while funding dividends, share repurchases, capital expenditures and pension obligations.
- Track environmental remediation liabilities and the Orangeburg EPA litigation for changes in estimated exposure.