Albemarle Corporation Form 10-Q Summary
Business Context and Reporting Period
Albemarle is a global specialty chemicals manufacturer serving petroleum refining, fire safety, electronics, construction, automotive, pharmaceuticals, crop protection and other markets. Effective January 1, 2014, the company realigned reporting into Performance Chemicals and Catalyst Solutions. This unaudited filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|
| Net sales | $604.7 million | $576.8 million | Up 5% |
| Gross profit / margin | $207.4 million / 34.3% | $191.7 million / 33.2% | Margin up 110 bps |
| Operating profit / margin | $110.2 million / 18.2% | $108.4 million / 18.8% | Profit up 2%; margin down 60 bps |
| Net income from continuing operations | $89.4 million | $88.5 million | Up 1% |
| Net income attributable to Albemarle | $22.4 million | $82.7 million | Down 73% |
| Diluted EPS from continuing operations | $1.04 | $0.95 | Up 9% |
| Diluted EPS including discontinued operations | $0.28 | $0.98 | Down 71% |
| Metric | Six Months 2014 | Six Months 2013 | Change |
|---|
| Net sales | $1.205 billion | $1.163 billion | Up 4% |
| Gross profit / margin | $403.0 million / 33.5% | $387.6 million / 33.3% | Margin up 20 bps |
| Operating profit / margin | $188.2 million / 15.6% | $220.8 million / 19.0% | Down 15% |
| Net income from continuing operations | $155.4 million | $176.2 million | Down 12% |
| Net income attributable to Albemarle | $79.0 million | $166.7 million | Down 53% |
| Diluted EPS from continuing operations | $1.77 | $1.87 | Down 5% |
- Q2 segment sales were $334.2 million for Performance Chemicals, down 3%, and $270.5 million for Catalyst Solutions, up 16%.
- Q2 segment income was $73.0 million for Performance Chemicals, down 12%, and $67.9 million for Catalyst Solutions, up 56%.
- Six-month segment income was $148.7 million for Performance Chemicals, down 10%, and $123.1 million for Catalyst Solutions, up 31%.
- Six-month cash flow from operations was $295.1 million, compared with $178.9 million in 2013. Q2 operating cash flow was $146.0 million, up 82% year over year.
- Capital expenditures were $46.7 million in the first six months, and management expected full-year 2014 capital expenditures of approximately $100 million to $125 million.
- Cash and cash equivalents were $515.1 million at June 30, 2014, compared with $477.2 million at December 31, 2013. Approximately $502.1 million was held by foreign subsidiaries.
- Total debt was $1.063 billion, including $363.0 million of commercial paper classified as current debt. Long-term debt, excluding the current portion, was $685.8 million.
- The company had no borrowings under its $750 million revolving credit facility, which matures in 2019 and permits an additional $250 million of capacity subject to the agreement.
- The company paid $41.3 million in dividends and repurchased $150.0 million of common stock during the first six months. The quarterly dividend was increased 15% to $0.275 per share.
Material Changes Versus the Prior Comparable Period
- Reported earnings were materially reduced by the planned divestiture of the antioxidant, ibuprofen and propofol businesses. The company recorded an $80.7 million pretax, or $60.3 million after-tax, expected loss on sale. Discontinued operations produced an after-tax loss of $60.0 million in Q2 and $61.8 million in the first six months, versus income in 2013.
- Performance Chemicals experienced weaker bromine and specialty chemicals demand, lower pricing and lower segment income. Catalyst Solutions benefited from stronger volumes across its businesses, favorable pricing and lower variable input costs.
- Six-month SG&A expense increased 16%, primarily because of higher incentive compensation, commissions and pension and postretirement costs. A $15.4 million pension actuarial loss was recorded following a workforce-related plan curtailment and remeasurement.
- Restructuring and other charges totaled $8.2 million in Q2 and $25.2 million for the six months. Items included acquisition-related costs, facility project write-offs, aluminum alkyl capacity reductions and related contract termination obligations.
- The company repurchased approximately 1.97 million shares during the first six months. A $100 million accelerated share repurchase agreement with JPMorgan remained subject to final settlement and potential adjustment.
- Commercial paper was reclassified from long-term debt to current debt, increasing reported current liabilities. The company classified its $325 million of senior notes due February 2015 as long-term based on its intent and ability to refinance them.
Guidance, Outlook, Risks and Unusual Items
- Management expected a 2014 effective tax rate of approximately 23%, subject to geographic earnings mix and tax-law changes.
- Management described the business fundamentals as sound but cited a slow and uneven global recovery, pricing pressure in brominated flame retardants, cautious customer inventories and changing electronics-market conditions.
- Performance Chemicals faced continued demand uncertainty, potential well-completion delays, oil-price sensitivity and regulatory risks affecting offshore drilling. Management was cautiously optimistic that brominated flame-retardant pricing had largely stabilized.
- Catalyst Solutions benefited from favorable volumes and was positioned for longer-term growth from refinery catalysts, plastics, LED applications and tighter fuel-quality requirements.
- The company expected up to $3 million of annual savings from reducing high-cost aluminum alkyl supply capacity, beginning within two years.
- On July 15, 2014, after quarter-end, Albemarle agreed to acquire Rockwood Holdings in a cash-and-stock transaction valued at approximately $6.2 billion. The transaction was expected to close by the first quarter of 2015, subject to shareholder, regulatory and other customary approvals. The contemplated cash consideration was expected to be funded with approximately $2.2 billion of cash and $1.5 billion of new senior-note financing.
- Albemarle had $325 million of senior notes maturing in February 2015 and had entered into a $325 million forward-starting interest-rate swap to hedge anticipated refinancing exposure. The swap had a $16.4 million liability fair value and a $10.4 million after-tax unrealized loss in accumulated other comprehensive income at June 30.
- Environmental liabilities totaled $13.0 million, with possible additional remediation costs of up to approximately $17 million before tax. A consent decree related to the Orangeburg, South Carolina facility required an approximately $332,000 EPA penalty and additional reporting.
- Other risks included raw-material and energy costs, foreign exchange, customer demand, competition, regulation, litigation, environmental obligations, pension funding, interest rates, financing-market volatility, acquisitions and integration execution.
Important Facts for Investors to Verify
- Final terms, financing, regulatory approvals and integration plans for the proposed Rockwood acquisition.
- Completion and final proceeds of the SI Group divestiture, including any difference from the recorded $80.7 million expected loss.
- Refinancing or repayment of the $325 million senior notes due February 2015 and the effect on interest expense and leverage.
- Final settlement of the JPMorgan accelerated share repurchase agreement and the resulting share count.
- Whether Performance Chemicals demand and pricing stabilize and whether Catalyst Solutions’ volume momentum persists.
- Execution of the aluminum alkyl capacity reduction, including the estimated savings and remaining contract obligations.
- Availability and location of cash, given that most cash was held by foreign subsidiaries, and compliance with revolving-credit and other debt covenants.
