Albemarle Corporation 2018 Form 10-K Summary
Business context and reporting period
Albemarle is a global specialty chemicals company serving energy storage, petroleum refining, consumer electronics, construction, automotive, pharmaceuticals, crop protection and other markets. Its reportable segments are Lithium, Bromine Specialties and Catalysts; the PCS product category was combined with Refining Solutions within Catalysts effective January 1, 2018. The filing covers the fiscal year ended December 31, 2018, with quarterly information including the fourth quarter.
The company operated 29 production and research facilities and served approximately 2,300 customers in approximately 100 countries. Approximately 74% of sales were to foreign countries.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $3.375 billion | $3.072 billion | +10% |
| Gross profit | $1.217 billion | $1.106 billion | +10% |
| Gross margin | 36.1% | 36.0% | +0.1 percentage point |
| Operating profit | $911.5 million | $571.7 million | +59% |
| Operating margin | 27.0% | 18.6% | +8.4 percentage points |
| Net income attributable to Albemarle | $693.6 million | $54.9 million | Significant increase |
| Diluted EPS from continuing operations | $6.34 | $0.49 | Significant increase |
| Adjusted EBITDA | $1.007 billion | $885.5 million | +14% |
| Cash flow from operations | $546.2 million | $304.0 million | +80% |
| Capital expenditures | $700.0 million | $317.7 million | +120% |
2018 net sales benefited from approximately $210.6 million of higher volumes, $141.0 million of favorable pricing and $30.6 million of favorable currency effects, partly offset by $78.9 million of sales lost from the Polyolefin Catalysts Divestiture.
Adjusted EBITDA by segment was $530.8 million for Lithium, $288.1 million for Bromine Specialties and $284.3 million for Catalysts. Lithium generated the largest improvement, with sales up 21% and adjusted EBITDA up 19%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $555.3 million at December 31, 2018, compared with $1.137 billion at December 31, 2017. Approximately $525.8 million was held by foreign subsidiaries.
- 2018 cash uses included $700.0 million of capital expenditures, $500.0 million of accelerated share repurchases, $144.6 million of dividends, $15.2 million of pension and postretirement contributions and $114.7 million of net commercial paper repayments.
- Total debt was approximately $1.705 billion, including $307.3 million of current debt and $1.398 billion of long-term debt. Commercial paper outstanding was $306.6 million, with a weighted-average interest rate of approximately 2.91% and maturity of 38 days.
- The company had a $1.0 billion unsecured revolving credit facility maturing in 2023, with no borrowings outstanding at year-end. It reported approximately $693.4 million of borrowing capacity under the credit facility and commercial paper program and stated that it was in compliance with debt covenants.
- Net current assets declined to approximately $815.2 million from $1.28 billion, primarily because of share repurchases, capital expenditures and lower cash balances.
Material changes versus the prior comparable period
- Net income attributable to Albemarle increased from $54.9 million to $693.6 million. The comparison was significantly affected by the $366.9 million net tax impact of the 2017 Tax Cuts and Jobs Act and the 2018 gain on divestiture.
- Albemarle completed the sale of its polyolefin catalysts and components business to W.R. Grace on April 3, 2018, receiving $413.6 million of net proceeds and recording a $210.4 million pretax gain, or $169.9 million after tax.
- Lithium sales increased 21% to $1.228 billion, driven by battery-grade demand, higher volumes and pricing. Lithium adjusted EBITDA increased 19% to $530.8 million.
- Bromine Specialties sales increased 7% to $917.9 million and adjusted EBITDA increased 11% to $288.1 million, mainly from pricing and volume gains.
- Catalysts sales increased 3% to $1.102 billion, despite the divestiture, while adjusted EBITDA was essentially unchanged at $284.3 million. Higher volumes and pricing were offset by raw-material and utility costs and the divested business.
- Capital expenditures more than doubled, primarily due to Lithium expansion and resource development. Manufacturing plants operated at approximately 78% aggregate capacity.
- The company repurchased approximately 5.3 million shares for $500 million under two accelerated share repurchase agreements.
- Foreign currency translation contributed a $150.3 million reduction to other comprehensive income in 2018, compared with a $227.4 million benefit in 2017.
Guidance, outlook, risks and unusual items
- Management expected 2019 capital expenditures of $800 million to $900 million, primarily for Lithium growth, mining resource development, capacity increases and productivity projects.
- Management expected the 2019 global effective tax rate to be approximately 23% to 24%.
- Lithium was expected to grow at a similar rate in 2019 as in 2018, supported by battery-grade demand, pricing and increased conversion capacity.
- Bromine Specialties was expected to show continued sales and profitability growth, although drilling-completion-fluid demand was expected to remain stable at a low level.
- Catalysts faced continued raw-material cost pressure, while longer-term demand was expected to benefit from cleaner-fuel requirements, refinery growth and demand for hydroprocessing and FCC catalysts.
- Albemarle entered into an agreement to acquire a 50% interest in the Wodgina lithium project for approximately $1.15 billion. Closing was expected in the second half of 2019, subject to regulatory and customary conditions, and was expected to be funded with cash and new debt.
- Other Lithium growth projects included La Negra II in Chile, expanded Xinyu, China conversion capacity and the planned Kemerton, Australia lithium hydroxide facility.
- Unusual 2018 items included the $210.4 million divestiture gain, $27.0 million of legal expenses, $19.7 million of indemnification-related expense, $15.6 million of environmental charges, a $15.0 million foundation contribution and a $14.0 million pretax pension and OPEB actuarial loss.
- The company self-reported potential improper payments by third-party sales representatives in its Catalysts business to the DOJ, SEC and Dutch Public Prosecutor and continued cooperating with those investigations. The duration, outcome, penalties and costs were not determinable.
- Environmental remediation liabilities totaled $49.6 million at year-end. Management estimated an additional possible exposure of $10 million to $35 million before tax beyond recorded amounts, primarily related to a formerly owned site indemnification.
- Key ongoing risks include lithium demand and pricing volatility, raw-material availability and cost, regulatory restrictions on chemicals and brominated flame retardants, international and currency exposure, refinery and electronics cyclicality, project execution, debt refinancing, environmental liabilities, cybersecurity and legal or regulatory proceedings.
Most important facts for investors to verify
- Whether Lithium demand, pricing, conversion capacity and the Wodgina and Kemerton projects support the stated growth outlook.
- The funding, closing conditions, construction schedule and leverage impact of the proposed $1.15 billion Wodgina transaction.
- The sustainability of 2018 earnings after excluding the $169.9 million after-tax divestiture gain and favorable tax effects related to the 2017 TCJA.
- Whether higher Lithium-related capital spending converts into expected production, sales and cash flow while maintaining liquidity.
- The outcome and potential financial impact of the DOJ, SEC and Dutch Public Prosecutor investigations.
- Exposure to raw-material inflation, lithium and bromine resource access, foreign exchange movements and environmental or product-liability claims.
- Near-term debt maturities, including $307.3 million due in 2019 and $175.3 million due in 2020, and the company’s ability to refinance or repay them.