Albemarle Corporation — 2013 Q2 Form 10-Q
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer operating through Polymer Solutions, Catalysts, and Fine Chemistry. This unaudited quarterly report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $634.2 million | $684.9 million | $1.276 billion | $1.397 billion |
| Gross profit | $196.6 million | $249.3 million | $396.2 million | $500.3 million |
| Gross margin | 31.0% | 36.4% | 31.1% | 35.8% |
| Operating profit | $112.2 million | $71.9 million | $227.1 million | $229.9 million |
| Operating margin | 17.7% | 10.5% | 17.8% | 16.5% |
| Net income attributable to Albemarle | $82.7 million | $50.1 million | $166.7 million | $164.4 million |
| Diluted EPS | $0.98 | $0.56 | $1.92 | $1.83 |
- Six-month operating cash flow was $178.9 million, versus $184.9 million in the prior-year period.
- Capital expenditures were $103.2 million; management expects approximately $150 million of capital expenditures for 2013.
- Cash and cash equivalents were $314.7 million at June 30, 2013, down from $477.7 million at December 31, 2012.
- Total debt was $1.077 billion, including $362.3 million of commercial paper; total debt was $699.3 million at December 31, 2012.
- The company had no borrowings outstanding under its $750 million revolving credit facility and reported approximately $649 million of borrowing capacity across its commercial paper program, revolving facility, and other lines, subject to covenants and availability.
- Variable-rate borrowings were $387.6 million, or approximately 36% of total debt. Management stated that the company was in compliance with its debt covenants.
- The quarterly dividend was increased 20% to $0.24 per share. The company repurchased 6.8 million shares in the second quarter for $450 million under an accelerated share repurchase program.
Material changes versus the prior comparable period
- Second-quarter sales declined 7% and six-month sales declined 9%, primarily because of unfavorable pricing, lower metals surcharges, lower bromine and flame-retardant pricing, foreign exchange effects, and the 2012 exit from the phosphorus flame-retardants business.
- Gross margin decreased materially despite lower variable input costs, reflecting pricing pressure, unfavorable currency effects, higher manufacturing costs, and $3.6 million of costs related to an alleged freight-vendor fraud claim.
- Operating profit and EPS increased in the second quarter largely because the 2012 period included $94.7 million of restructuring charges related to exiting the phosphorus flame-retardants business. On a six-month basis, operating profit was approximately flat and segment profitability declined.
- All three segments reported lower second-quarter segment income: Polymer Solutions declined 34%, Catalysts 25%, and Fine Chemistry 25%. Catalysts sales increased 2%, but pricing, metals-surcharge volatility, manufacturing costs, and lower joint-venture income reduced profitability.
- Albemarle retrospectively adopted mark-to-market pension and postretirement accounting. The company also corrected a $10.3 million pension and OPEB actuarial gain relating to 2011 in the 2012 comparative periods; management deemed the correction immaterial to previously issued financial statements.
- The effective tax rate declined to 20.9% in the second quarter and 22.9% for the first six months, compared with 34.9% and 28.8%, respectively, in the prior-year periods.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects a 2013 effective tax rate of approximately 22.9%, subject to geographic earnings mix and tax-law changes.
- Management expects cash on hand, operating cash flow, and long-term borrowings to fund operations, debt service, capital expenditures, pension contributions, dividends, and planned share repurchases for the foreseeable future.
- Management described continuing economic and end-market headwinds and noted that customer order trends could remain below historical norms, potentially reducing sales and profitability and causing production assets to operate below optimum levels.
- Growth initiatives include GreenCrest commercial qualification, a planned 50,000-metric-ton flame-retardants facility in China, and the Saudi Arabia aluminum-alkyls joint venture, which was scheduled for commercial production in the third quarter of 2013.
- Environmental liabilities totaled $18.3 million at June 30, 2013. Management estimated that additional environmental remediation costs could reach approximately $17 million before tax. The company also disclosed EPA litigation involving its Orangeburg, South Carolina facility; the outcome and financial impact could not be predicted with certainty.
- The phosphorus flame-retardants exit generated $94.7 million of charges in 2012, with related restructuring payments expected through 2014. The 2012 comparative period also included an $8.1 million litigation settlement gain and an $8 million charitable contribution.
- Principal risks include demand and pricing volatility, raw-material and energy costs, foreign exchange, customer concentration and order timing, regulation and litigation, environmental obligations, pension funding, interest rates, capital-market access, geopolitical conditions, and execution of cost-reduction and growth initiatives.
Most important facts for investors to verify
- Whether pricing pressure, metals-surcharge volatility, foreign exchange, and weak order patterns persist and continue to compress margins.
- The final share count and cash or equity settlement of the accelerated share repurchase program, expected by year-end 2013.
- The company’s ability to refinance or repay $362.3 million of commercial paper and maintain access to its revolving credit facility.
- Progress and capital requirements for GreenCrest, the China joint venture, the Saudi Arabia facility, and other growth projects.
- Developments in the Orangeburg EPA litigation and environmental remediation obligations, including potential costs above recorded reserves.
- The effect of the pension accounting change and the corrected 2012 comparative figures on period-to-period earnings analysis.