ALBEMARLE CORP quarterly report, Q2 FY2018

Albemarle Corporation — 2018 Q2 Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2018; filed August 7, 2018. Results are unaudited and should be read with the company’s 2017 Form 10-K. Albemarle operates through Lithium, Bromine Specialties and Catalysts, plus All Other activities.

Financial performance and liquidity

Metric	Three months ended June 30, 2018	Three months ended June 30, 2017	Six months ended June 30, 2018	Six months ended June 30, 2017
Net sales	$853.9 million	$737.3 million	$1.68 billion	$1.46 billion
Gross profit / margin	$311.4 million / 36.5%	$272.0 million / 36.9%	$616.3 million / 36.8%	$526.9 million / 36.1%
Operating profit / margin	$390.4 million / 45.7%	$138.0 million / 18.7%	$573.0 million / 34.2%	$259.7 million / 17.8%
Net income attributable to Albemarle	$302.5 million	$103.3 million	$434.2 million	$154.5 million
Diluted EPS	$2.73	$0.92	$3.90	$1.37
Adjusted EBITDA	$258.6 million	$218.9 million	$507.3 million	$430.3 million
Operating cash flow	$102.3 million	Not separately provided in the filing text	$223.9 million	$(54.5) million

Second-quarter sales increased 16%, driven by $86.7 million of higher volumes, $40.0 million of favorable pricing and $15.6 million of favorable currency effects, partly offset by $25.7 million from the divested polyolefin catalysts and components business.
Six-month adjusted EBITDA increased 18% to $507.3 million. Lithium adjusted EBITDA rose 27% to $272.6 million; Bromine Specialties rose 7% to $139.3 million; Catalysts rose 4% to $142.9 million.
Cash and cash equivalents were $908.1 million at June 30, 2018, compared with $1.14 billion at December 31, 2017. Foreign subsidiaries held $593.2 million of cash.
Six-month cash uses included $280.9 million of capital expenditures, $250.0 million of share repurchases, $72.5 million of dividends to shareholders and $213.3 million of net commercial paper repayments. Capital expenditures were expected to total approximately $800 million to $900 million for 2018.
Total debt was $1.62 billion at June 30, 2018, including $208.0 million of commercial paper and $1.41 billion of noncurrent debt. The company had no borrowings under its new $1.0 billion revolving credit facility, which matures June 21, 2023.
The company reported available borrowing capacity of $792.0 million under its commercial paper program and revolving credit agreement, plus $248.3 million under other existing credit lines. Management stated that debt covenants were satisfied.
The quarterly dividend increased 5% to $0.335 per share. The company repurchased 2,354,133 shares for $250.0 million under an accelerated share repurchase agreement.

Material changes versus the prior comparable period

Albemarle completed the April 3, 2018 sale of the polyolefin catalysts and components portion of its Performance Catalyst Solutions business to W.R. Grace for approximately $416.7 million of net cash proceeds. The transaction generated a $218.7 million pretax gain, or approximately $176.6 million after tax, and materially increased reported earnings.
The Catalysts and former Refining Solutions businesses were combined into a single Catalysts reportable segment; 2017 segment results were recast for comparison.
Reported profitability also benefited from the absence of 2017 charges, including a $52.8 million loss on early extinguishment of debt, $22.5 million of inventory markup expense and $17.1 million of restructuring costs.
2018 included unusual expenses of $28.0 million in legal accruals, $15.6 million of environmental charges and a $15.0 million contribution to the Albemarle Foundation.
Gross margin declined in the second quarter to 36.5% from 36.9%, primarily reflecting higher Lithium royalty and material costs; the six-month gross margin improved to 36.8% from 36.1%.
Other comprehensive income changed to a $127.2 million loss in the quarter and a $76.1 million loss for six months, mainly from adverse foreign-currency translation, compared with gains in the prior-year periods.
Inventory increased to $665.5 million from $592.8 million at year-end, primarily due to Lithium inventory growth and anticipated Catalysts sales and production timing.

Guidance, outlook and management commentary

Management expected strong year-over-year Lithium growth for the remainder of 2018, supported by battery-grade demand, pricing improvements and increased conversion capacity. Longer-term demand was linked to electric vehicles, energy storage and declining battery costs.
Bromine Specialties was expected to deliver modest sales and profitability growth, supported by flame retardants and derivatives. Drilling-completion-fluid demand was expected to remain low and stable while raw-material costs could rise if oil prices increased.
Catalysts faced continued raw-material cost pressure. The curatives business was expected to be affected by a temporary key-material shortage, while organometallics profitability was expected to stabilize through productivity gains and higher volumes.
Management forecast a 2018 global effective tax rate of approximately 23.9%, subject to geographic earnings mix, tax-law changes and the continuing analysis of the U.S. Tax Cuts and Jobs Act.
Management expected cash on hand, operating cash flow, divestiture proceeds and borrowing capacity to fund operations, debt service, capital expenditures, dividends, pension contributions, share repurchases and potential acquisitions for the foreseeable future.

Risks, contingencies and unusual items

The company voluntarily self-reported potential improper payments by third-party sales representatives in its Refining Solutions business to the Department of Justice and SEC. Investigations were ongoing, and the duration, outcome, penalties and related costs could not be predicted.
A jury verdict related to a 2014 sales agreement resulted in a $17.6 million accrual; the company was evaluating appeal options. A separate proposed settlement related to guarantees from a divested business resulted in a $10.4 million accrual.
Environmental liabilities totaled $52.7 million, including $47.7 million classified as noncurrent. Management estimated a reasonable possibility of an additional $10 million to $25 million of remediation costs beyond recorded amounts, although timing and ultimate costs remain uncertain.
Foreign-currency risk was significant. Six-month foreign-currency forward contract notional amounts totaled $493.1 million, and six-month losses from changes in fair value were $12.8 million.
Key operating risks include raw-material and energy costs, product demand and pricing, customer concentration and order timing, foreign-exchange volatility, regulatory and environmental matters, chemical manufacturing hazards, acquisitions and divestitures, cybersecurity, geopolitical conditions and access to financing.
The company adopted the new revenue-recognition standard effective January 1, 2018, with no material initial impact. Lease accounting implementation was ongoing, and the eventual balance-sheet impact had not been determined.

Important facts for investors to verify

Separate recurring operating performance from the $218.7 million pretax divestiture gain when evaluating earnings and valuation.
Reconcile adjusted EBITDA to GAAP earnings and assess the sustainability of Lithium pricing, volume growth, royalties and capacity-investment returns.
Track cash conversion, inventory growth, planned 2018 capital expenditures of $800 million to $900 million and the effect of continued share repurchases on liquidity.
Monitor the DOJ and SEC reviews, related legal accruals and potential penalties or remediation costs.
Evaluate environmental liabilities and the estimated $10 million to $25 million potential exposure above recorded reserves.
Confirm completion and final share delivery under the $250 million ASR agreement, expected by the end of the third quarter of 2018.
Assess the availability and geographic accessibility of cash, given that $593.2 million was held by foreign subsidiaries and was primarily intended for use outside the United States.