Business Context and Reporting Period
Albemarle Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2021. The company is a global specialty chemicals producer with reportable segments in Lithium, Bromine Specialties, and Catalysts, plus the Fine Chemistry Services (FCS) business classified as All Other.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $829.3 million | $738.8 million | +12% |
| Gross profit | $263.7 million | $242.0 million | +9% |
| Gross margin | 31.8% | 32.8% | Down 100 bps |
| Operating profit | $155.9 million | $124.0 million | +26% |
| Net income attributable to Albemarle | $95.7 million | $107.2 million | Down 11% |
| Diluted EPS | $0.84 | $1.01 | Down 17% |
| Adjusted EBITDA | $230.1 million | $196.4 million | +17% |
| Cash flow from operations | $157.9 million | $155.1 million | +2% |
Sales increased primarily from $108.6 million of volume growth across the reportable segments and $17.0 million of favorable currency translation, partly offset by $35.0 million of unfavorable pricing, primarily in Lithium. Gross margin declined due to unfavorable Lithium pricing, approximately $33 million of higher production and utility costs in Bromine Specialties and Catalysts from the U.S. Gulf Coast winter storm, and higher freight costs.
SG&A declined 9% to $93.2 million, and research and development expense declined 9% to $14.6 million. Interest and financing expense increased to $43.9 million from $16.9 million, including a $27.8 million loss on early extinguishment of debt. The effective tax rate increased to 17.9% from 16.0%, including a $7.9 million out-of-period tax adjustment related to 2017, partly offset by a foreign valuation allowance release.
Segment sales and adjusted EBITDA were:
| Segment | Sales | Sales Change | Adjusted EBITDA | EBITDA Change |
|---|---|---|---|---|
| Lithium | $279.0 million | +18% | $106.4 million | +35% |
| Bromine Specialties | $280.4 million | +21% | $94.6 million | +14% |
| Catalysts | $220.2 million | +6% | $25.4 million | Down 46% |
| All Other | $49.6 million | Down 22% | $21.5 million | Down 6% |
At March 31, 2021, cash and cash equivalents were $569.9 million, down from $746.7 million at December 31, 2020. Total debt was approximately $2.03 billion, compared with $3.57 billion at year-end 2020, following substantial debt repayments. Albemarle reported $1.5 billion of availability under its commercial paper program and credit agreements, plus $131.2 million under other credit lines, subject to covenants. Management stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Net sales increased 12%, with volume growth in all reportable segments.
- Net income attributable to Albemarle and diluted EPS declined despite higher operating profit, primarily because of debt extinguishment costs, lower equity income from the Talison lithium joint venture, a higher tax rate, and share dilution from the February equity offering.
- The February 2021 equity offering generated approximately $1.5 billion of gross proceeds from the issuance of approximately 9.8 million shares, increasing the weighted-average diluted share count to 113.3 million from 106.5 million.
- The company repaid the remaining 1.875% senior notes, floating-rate notes, commercial paper, the 2019 Credit Facility balance, and portions of other notes. The repayment reduced current debt obligations and extended liquidity flexibility but produced the $27.8 million extinguishment loss.
- Comprehensive loss attributable to Albemarle improved to a loss of $23.5 million from a loss of $23.6 million, while total other comprehensive loss improved to $24.0 million from $130.7 million, primarily because 2020 included substantially larger cash-flow hedge losses.
- Adjusted EBITDA increased in Lithium and Bromine Specialties, while Catalysts declined because of the Gulf Coast winter storm, unfavorable FCC pricing, freight costs, and lower refinery-related demand.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects 2021 capital expenditures of approximately $850 million to $950 million, primarily for Lithium growth and capacity projects in Australia, Chile, and Silver Peak, Nevada.
- Albemarle plans to invest $30 million to $50 million to double Silver Peak production by 2025. Kemerton and La Negra facilities are expected to be completed by the end of 2021, with sales volumes beginning in 2022.
- Lithium results are expected to be higher year over year, supported by plant restarts, efficiency improvements, tolling, and recovering EV demand, but pricing pressure and higher start-up costs remain risks. The Wodgina mine remains idled pending sufficient demand.
- Bromine Specialties sales and profitability are expected to be modestly higher, although pandemic-related effects, oil prices, raw-material costs, and drilling-market uncertainty remain risks.
- Catalysts results are expected to be down year over year. Refining catalyst demand is affected by customer order changes, the winter storm, COVID-19 effects, and deferred refinery spending; demand may not normalize until late 2022 at the earliest.
- The company agreed to sell FCS to W. R. Grace for approximately $570 million, consisting of $300 million in cash and $270 million of preferred equity. Closing was expected in the second quarter of 2021, subject to customary conditions and regulatory approvals. Albemarle expected to record a gain in the second quarter.
- COVID-19 had not materially affected operations as of the filing, but management could not predict the ultimate impact. Potential risks include supply-chain disruption, customer demand changes, mandated shutdowns, and reduced liquidity or financing access.
- Recorded environmental liabilities were $45.0 million. Management estimated an additional possible exposure of $10 million to $35 million before tax, principally related to remediation at a formerly owned site.
- Albemarle is cooperating with the DOJ, SEC, and Dutch Public Prosecutor regarding potential improper payments by third-party sales representatives in the Refining Solutions business. The duration, outcome, penalties, and costs are not predictable.
- Off-balance-sheet arrangements, including bank guarantees and letters of credit, totaled approximately $86.9 million. Management did not expect them to have a material effect on liquidity or financial condition.
Important Facts for Investors to Verify
- Whether Lithium pricing stabilizes and whether EV and energy-storage demand supports planned capacity investments.
- The timing and final economics of the FCS divestiture, including receipt and valuation of the Grace preferred equity and the expected gain.
- Execution, cost, and commissioning timelines for the Kemerton, La Negra, and Silver Peak projects.
- Recovery of Catalysts profitability after the Gulf Coast winter storm and the pace of refinery-market normalization.
- The effect of substantial capital expenditures and shareholder dividends on free cash flow and leverage.
- The outcome and potential financial exposure from the DOJ, SEC, and Dutch Public Prosecutor investigations.
- Potential environmental remediation costs above recorded liabilities and any changes in regulatory requirements.
- Foreign exchange, commodity pricing, raw-material, interest-rate, and COVID-19 risks affecting future earnings and cash flow.