Albemarle Corporation — Q3 2010 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals producer operating through Polymer Solutions, Catalysts, and Fine Chemistry. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | Change |
|---|---|---|---|
| Net sales | $585.0 million | $515.3 million | +14% |
| Gross profit | $196.8 million | $134.1 million | +47% |
| Gross margin | 33.6% | 26.0% | +760 bps |
| Operating profit | $120.6 million | $62.9 million | +92% |
| Operating margin | 20.6% | 12.2% | +840 bps |
| Net income attributable to Albemarle | $93.7 million | $52.1 million | +80% |
| Diluted EPS | $1.02 | $0.57 | +79% |
| Metric | Nine months 2010 | Nine months 2009 | Change |
|---|---|---|---|
| Net sales | $1.758 billion | $1.447 billion | +21% |
| Gross profit | $549.5 million | $334.4 million | +64% |
| Gross margin | 31.3% | 23.1% | +820 bps |
| Operating profit | $303.5 million | $122.8 million | +147% |
| Operating margin | 17.3% | 8.5% | +880 bps |
| Net income attributable to Albemarle | $238.7 million | $116.0 million | +106% |
| Diluted EPS | $2.59 | $1.26 | +106% |
Q3 sales growth reflected a 12% volume benefit and 4% favorable price/mix, partly offset by a 2% foreign-exchange headwind. Management attributed margin expansion primarily to stronger volumes, pricing and mix, higher production rates, favorable fixed-cost absorption, and improved metals-cost pass-through in hydroprocessing catalysts.
- Q3 segment sales were $231.8 million for Polymer Solutions, $214.8 million for Catalysts, and $138.4 million for Fine Chemistry.
- Q3 segment income increased 125% for Polymer Solutions, 106% for Catalysts, and 16% for Fine Chemistry.
- Equity income from unconsolidated investments rose to $9.2 million in Q3 and $30.0 million for the nine-month period.
- Cash provided by operating activities was $275.7 million for the first nine months, compared with $259.4 million in 2009.
- Capital expenditures were $50.0 million; net cash used in investing activities was $60.6 million.
- Cash and cash equivalents increased to $424.7 million at September 30, 2010, from $308.8 million at December 31, 2009.
- Total debt was $765.7 million, including $755.6 million classified as long-term debt, compared with $812.7 million at December 31, 2009.
- The company reported $347.0 million of additional borrowing capacity under its revolving credit facility and $151.0 million under other existing lines, subject to covenants.
- Cash dividends declared increased to $0.14 per share in Q3 from $0.125 per share in the prior-year quarter. A fourth-quarter dividend of $0.14 per share was declared on October 15, 2010.
Material changes versus the prior comparable period
- All three segments benefited from improved demand and higher volumes following weak 2009 market conditions.
- Polymer Solutions benefited from stronger consumer electronics, automotive, and construction demand, especially for brominated flame retardants.
- Catalysts benefited from higher refinery and polyolefin catalyst volumes, favorable product mix, and improved metals-cost recovery.
- Fine Chemistry benefited from higher performance chemicals and custom-manufacturing volumes, partly offset by unfavorable price/mix and foreign exchange.
- Q3 2010 contained no restructuring or Port de Bouc charges. The first nine months included $7.0 million of restructuring charges related principally to planned workforce reductions at Bergheim, Germany. The comparable 2009 period included $12.4 million of Port de Bouc divestiture-related charges.
- Effective January 1, 2010, Albemarle deconsolidated Stannica LLC after reducing its ownership to 50%; the retained investment is reported within unconsolidated investments.
- Albemarle sold its Teesport, UK manufacturing site for approximately $8.6 million and began acquiring property and equipment in Yeosu, South Korea.
Guidance, outlook, risks, and unusual items
Management expected a moderate seasonal downturn entering the fourth quarter but anticipated ending 2010 with strong earnings. It expected the fundamentals supporting 2010 performance to support solid earnings growth in 2011. Management projected a 2010 effective tax rate of approximately 24.3% and 2010 capital expenditures of approximately $80 million to $90 million.
- Yeosu, South Korea investments are intended to support metallocene polyolefin catalysts and trimethyl gallium markets. Intermediate commercial operations were expected in mid-2011, with full operation targeted for 2012.
- Rare-earth material costs in the FCC catalysts business increased following Chinese export quotas; management cited supply-security measures and cost-pass-through mechanisms.
- Recorded environmental liabilities were $14.2 million. Management estimated additional environmental remediation exposure could be up to approximately $17 million before tax, although timing and ultimate costs remain uncertain.
- The company continued discussions with the EPA regarding alleged regulatory violations at its Orangeburg, South Carolina facility. Potential fines, penalties, or capital expenditures cannot be predicted with certainty.
- Variable-rate borrowings totaled $397.0 million, or 52% of total debt. A hypothetical 10% rate change was estimated to affect annualized interest expense by approximately $0.5 million.
- Foreign-currency forwards had a $323 million aggregate notional value and a $3.8 million net fair-value asset at September 30, 2010.
- Key risks include economic conditions, customer demand and orders, raw-material and energy costs, foreign exchange, regulation, litigation, environmental obligations, pension costs, interest rates, financing-market conditions, and execution of cost-reduction and growth initiatives.
Most important facts for investors to verify
- Whether volume growth, pricing, and favorable fixed-cost absorption remain sustainable after the expected seasonal fourth-quarter slowdown.
- The extent to which metals-cost and rare-earth cost pass-through mechanisms protect Catalysts margins.
- Progress, capital requirements, and customer qualification timing for the Yeosu, South Korea projects and the Saudi Arabia joint venture.
- Debt maturities, revolving-credit availability, covenant compliance, and exposure to variable interest rates.
- Potential cash costs from the Bergheim restructuring, environmental remediation, EPA proceedings, pensions, and uncertain tax positions.
- The effect of the Stannica deconsolidation and other joint-venture changes on reported sales, earnings, cash flow, and noncontrolling interests.