Albemarle Corporation — Q1 2013 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer serving petroleum refining, plastics and packaging, construction, automotive, pharmaceuticals, agriculture, food safety and custom chemistry markets. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012. Reportable segments were Polymer Solutions, Catalysts and Fine Chemistry.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $641.6 million | $711.7 million | Down 10% |
| Gross profit | $199.6 million | $251.0 million | Down 20% |
| Gross margin | 31.1% | 35.3% | Down 4.2 percentage points |
| Operating profit | $114.9 million | $157.9 million | Down 27% |
| Operating margin | 17.9% | 22.2% | Down 4.3 percentage points |
| Net income attributable to Albemarle | $84.0 million | $114.3 million | Down 26% |
| Diluted EPS | $0.94 | $1.27 | Down 26% |
| Operating cash flow | $98.7 million | $123.5 million | Down 20% |
| Capital expenditures | $55.3 million | $54.8 million | Approximately flat |
| Effective tax rate | 24.8% | 26.2% | Improved |
Net income was $89.5 million, including $10.3 million of equity income from unconsolidated investments and $5.5 million attributable to noncontrolling interests. The company declared a quarterly dividend of $0.24 per share, increased 20% from $0.20 in the prior-year quarter.
Cash and cash equivalents were $434.9 million at March 31, 2013, compared with $477.7 million at December 31, 2012. Total debt was $695.8 million, including $686.6 million classified as long-term debt. The company had no borrowings outstanding under its $750 million unsecured revolving credit facility and reported more than $1.0 billion of borrowing capacity under that facility and other existing lines, subject to covenants.
Segment performance and material changes
- Polymer Solutions: Sales declined 6% to $214.8 million and segment income declined 18% to $45.3 million. Results reflected the 2012 exit from the phosphorus flame retardants business, lower pricing, lower fixed-cost absorption, higher manufacturing costs and unfavorable currency effects.
- Catalysts: Sales declined 20% to $235.6 million and segment income declined 32% to $57.0 million. Lower metals surcharges, unfavorable product mix and lower volumes in polymer catalysts and clean-fuels technology were the primary drivers.
- Fine Chemistry: Sales increased 1% to $191.3 million, but segment income declined 24% to $31.4 million. Favorable volumes were offset by lower pricing, delays in product launches and higher noncontrolling interests related to the Jordan Bromine joint venture.
Consolidated sales decreased primarily because of unfavorable pricing impacts of 7%, lower volumes of 2% and unfavorable foreign-currency effects of 1%. Gross profit was also affected by higher manufacturing costs and adverse volume, mix and currency impacts, partly offset by lower variable input costs.
SG&A declined 13% to $64.8 million, reflecting lower personnel-related costs, commissions and other spending. The first quarter of 2012 included an $8.1 million litigation settlement gain and an $8.0 million charitable contribution, making the comparison unusual. The 2012 comparative results were retrospectively adjusted for the company’s change to mark-to-market accounting for pension and other postretirement actuarial gains and losses.
Cash flow, capital allocation and liquidity
- Operating cash flow of $98.7 million funded $55.3 million of capital expenditures, $60.8 million of share repurchases, $17.8 million of dividends, $3.6 million of debt repayments and $5.4 million of withholding taxes on stock-based compensation distributions.
- The company repurchased 1,013,650 shares for $64.5 million, or $63.65 per share, during the quarter. The authorized program permits repurchases of up to 15 million shares, with 13,986,350 shares remaining at March 31, 2013.
- Management expected 2013 capital expenditures of approximately $150 million to $175 million for capacity expansion, cost reduction and continuity projects.
- Management stated that cash on hand, operating cash flow and long-term borrowings should be sufficient for operating expenses, debt service, capital expenditures, pension contributions, dividends and planned share repurchases for the foreseeable future.
Guidance, outlook, risks and unusual items
Management did not provide specific full-year earnings or revenue guidance in the filing. It expected the global economic environment and select business conditions to remain headwinds beyond the first quarter, while emphasizing cost management, volume growth and long-term demand trends.
- The company expected its 2013 global effective tax rate to be approximately 24.8%, subject to geographic earnings mix and tax-law changes.
- Jordan Bromine completed the first phase of an expansion that doubled bromine production capacity. A second phase for key bromine derivatives was scheduled for commissioning in May 2013.
- Albemarle approved a $30 million expansion at its Tyrone, Pennsylvania facility, with the first additional capacity expected to be operational in the second half of 2014.
- The company expected to repurchase approximately 10% of outstanding shares over the following 10 to 15 months, funded through cash, operating cash flow and possibly debt.
- Recorded environmental liabilities were $19.2 million. Management estimated that additional environmental remediation costs could be up to approximately $15 million before tax, although the timing and amount remain uncertain.
- The company is defending an EPA and State of South Carolina lawsuit involving alleged environmental and reporting violations at its Orangeburg facility. The outcome and financial impact could not be predicted, but management did not expect a material adverse effect.
- Key risks include weak economic conditions, customer demand and order timing, pricing and raw-material volatility, metals surcharges, foreign-currency fluctuations, regulatory and environmental matters, litigation, supply availability, pension obligations, interest rates and access to capital.
Important facts for investors to verify
- Whether lower pricing and metals-surcharge volatility continue to pressure Catalysts and other segment margins.
- Whether end-market demand stabilizes and whether Polymer Solutions operates below optimal capacity following the phosphorus flame retardants exit.
- Progress, timing and expected returns from the Jordan Bromine and Tyrone capacity expansions.
- Actual 2013 capital spending, share repurchases and resulting leverage and liquidity.
- Future cash generation relative to dividends, buybacks, debt maturities and the company’s stated $150 million to $175 million capital-expenditure plan.
- Developments in the Orangeburg environmental litigation and the company’s estimated additional environmental remediation exposure.
- The effect of foreign exchange, particularly the Japanese yen, on sales, margins and accumulated other comprehensive income.