Albemarle Corporation 2010 Form 10-K Summary
Business context and reporting period
Albemarle is a global specialty-chemicals producer serving consumer electronics, petroleum refining, utilities, packaging, construction, automotive, pharmaceuticals, crop protection, food safety and custom chemistry markets. Operations are managed through Polymer Solutions, Catalysts and Fine Chemistry. The filing covers the fiscal year ended December 31, 2010; quarterly data identifies the fourth quarter as a period within the annual filing.
- Approximately 45 facilities and 4,020 employees worldwide.
- Approximately 3,000 customers in more than 100 countries.
- Manufacturing plants operated at approximately 70% aggregate capacity during 2010.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2.363 billion | $2.005 billion | Up 18% |
| Gross profit | $745.9 million | $483.9 million | Up 54% |
| Gross margin | 31.6% | 24.1% | Up 7.5 percentage points |
| Operating profit | $414.8 million | $186.3 million | Up 123% |
| Operating margin | 17.6% | 9.3% | Up 8.3 percentage points |
| Net income attributable to Albemarle | $323.7 million | $178.4 million | Up 81% |
| Diluted EPS | $3.51 | $1.94 | Up 81% |
| Cash flow from operations | $331.3 million | $358.5 million | Down $27.2 million |
| Capital expenditures | $75.5 million | $100.8 million | Down $25.3 million |
Results benefited from stronger volumes across all segments, favorable price and product mix, improved production rates and fixed-cost absorption, and better metals-cost realization in refinery catalysts. SG&A increased 25% to $265.7 million, primarily because of higher employee-related costs. Research and development expense declined 4% to $58.4 million.
Net sales by segment were $903.7 million for Polymer Solutions, $890.0 million for Catalysts and $569.0 million for Fine Chemistry. Segment income increased 223%, 67% and 53%, respectively.
Cash flow, liquidity and debt
- Cash and cash equivalents increased to $529.7 million at December 31, 2010 from $308.8 million.
- Operating cash flow funded $75.5 million of capital expenditures, $49.6 million of shareholder dividends and $14.9 million of share repurchases.
- Expected 2011 capital expenditures were approximately $150 million.
- Total debt was $860.9 million, including $324.9 million of 5.10% senior notes due 2015 and $346.9 million net carrying value of 4.50% senior notes due 2020.
- No borrowings were outstanding under the $675 million revolving credit facility at year-end. Additional borrowing capacity under that facility and other lines exceeded $791 million, subject to covenants.
- The company stated that it was in compliance with its debt covenants and had no significant debt maturities before 2013.
- Debt proceeds in 2010 were used partly to repay revolving borrowings and fund pension contributions.
Material changes versus prior comparable period
- 2010 reflected a broad recovery from the 2009 downturn, with volume increases contributing approximately 17% to consolidated sales growth and favorable price/mix contributing approximately 2%.
- Polymer Solutions benefited from stronger demand in consumer electronics, automotive and construction-related markets.
- Catalysts benefited from higher refinery operating rates, stronger polyolefin demand and improved recovery of metals costs.
- Fine Chemistry benefited from higher performance-chemicals volumes and recovering demand in bromine-related markets.
- Special charges declined to $7.0 million in 2010 from $24.0 million in 2009. The 2010 charge principally related to workforce reductions at the Bergheim, Germany site.
- The 2009 effective tax rate of negative 4.4% included approximately $22.8 million of tax benefits, primarily from IRS audit settlements. The 2010 effective tax rate was 23.6%, creating a less favorable year-over-year tax comparison.
- Stannica LLC was deconsolidated effective January 1, 2010 after Albemarle reduced its ownership to 50%; the retained investment is accounted for under the equity method.
- Albemarle issued $350 million of 4.50% senior notes in December 2010 and increased its annual dividend to $0.56 per share. The quarterly dividend was subsequently increased to $0.165 per share in February 2011.
- The company made $80.1 million of pension and postretirement contributions in 2010, including $70 million of voluntary U.S. pension contributions, and made an additional $50 million contribution in January 2011.
Guidance, outlook, risks and unusual items
Management expected solid earnings growth in 2011, supported by recovering markets, tight supply conditions, emerging-market demand, productivity initiatives and pricing actions. The company expected a 2011 effective tax rate of approximately 25%, subject to the geographic mix of earnings.
- Polymer Solutions: expected volume growth in fire safety products, expansion in China and additional phosphorus-based flame-retardant capacity.
- Catalysts: expected higher volumes and stable pricing, with growth supported by petroleum-product demand, lower-quality crude feedstocks, stricter fuel standards and specialty-plastics demand.
- Fine Chemistry: expected continued growth in bromine products, completion fluids, mercury-control solutions, pharmaceutical products and outsourced chemistry services.
- Planned investments included a metallocene polyolefin catalyst and trimethyl-gallium site in South Korea, a Saudi Arabian organometallics joint venture expected to operate in 2012, and a proposed world-scale hydroprocessing-catalyst plant in Brazil.
Key risks include cyclical customer demand, raw-material and energy-price volatility, inability to pass through cost increases, competition, foreign-exchange exposure, international operations, operating hazards, product-performance guarantees, environmental liabilities, regulatory restrictions on brominated flame retardants and methyl bromide, pension funding requirements, debt refinancing and joint-venture execution.
Decabromodiphenyl ether represented approximately 1% of 2010 net sales and was subject to additional restrictions and a voluntary U.S. withdrawal program. HBCD represented approximately 1% of annual net sales and could face a European ban as soon as 2014. Environmental remediation liabilities recorded at year-end were approximately $13.8 million; management estimated reasonably possible additional costs of up to approximately $16.8 million before tax.
An unresolved EPA Notice of Violation relating to pharmaceutical air-emission requirements at the Orangeburg, South Carolina facility could result in fines, penalties or capital expenditures, although management did not expect a material adverse effect. Outstanding letters of credit and guarantees totaled approximately $34.2 million.
Investor verification items
- Verify the sustainability of the 31.6% gross margin and the extent to which 2010 improvement depended on volume recovery, fixed-cost absorption and metals-cost pass-through.
- Reconcile operating cash flow with reported earnings, particularly the effects of higher inventories, receivables and pension contributions.
- Review debt maturities beginning in 2013, the 2015 and 2020 senior notes, revolving-facility covenants and refinancing assumptions.
- Assess pension underfunding, expected 2011 contributions and sensitivity to discount rates and asset returns.
- Monitor regulatory developments affecting brominated flame retardants, HBCD, decabromodiphenyl ether and methyl bromide.
- Evaluate environmental reserves and the potential additional remediation exposure of up to approximately $16.8 million before tax.
- Track execution and funding requirements for the South Korea, Brazil and Saudi Arabia growth projects.
- Consider the comparability impact of the 2009 IRS tax benefits, the 2010 Stannica deconsolidation and 2010 restructuring charges.