Albemarle Corporation 2017 Q3 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals producer serving petroleum refining, energy storage, electronics, construction, automotive, pharmaceuticals, crop protection and other markets. The unaudited filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Reportable segments were Lithium and Advanced Materials, Bromine Specialties and Refining Solutions; the company announced that PCS will merge with Refining Solutions in the first quarter of 2018 to create a Catalysts segment.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $754.9 million | $654.0 million | $2.214 billion | $1.981 billion |
| Gross profit | $275.8 million | $239.0 million | $803.0 million | $729.6 million |
| Gross margin | 36.5% | 36.5% | 36.3% | 36.8% |
| Operating profit | $148.4 million | $124.9 million | $410.3 million | $491.2 million |
| Operating margin | 19.7% | 19.1% | 18.5% | 24.8% |
| Net income attributable to Albemarle | $118.7 million | $128.2 million | $273.2 million | $41.6 million |
| Diluted EPS from continuing operations | $1.06 | $0.93 | $2.43 | $3.53 |
| Adjusted EBITDA | $209.4 million | $188.3 million | $639.7 million | $570.8 million |
Q3 sales increased 15%, driven by $46.3 million of higher volumes, $51.1 million of favorable pricing and $3.0 million of favorable currency effects. Nine-month sales increased 12%, driven by $181.0 million of volume growth and $95.9 million of favorable pricing, partly offset by divestiture effects and unfavorable currency.
- Segment trends: Q3 Lithium and Advanced Materials sales rose 43% and adjusted EBITDA rose 42%; Bromine Specialties sales rose 9% and adjusted EBITDA rose 23%; Refining Solutions sales declined 11% and adjusted EBITDA declined 34%.
- Cash flow: Nine-month operating cash flow was $74.8 million versus $454.1 million in 2016. Q3 operating cash flow was $129.3 million versus $201.3 million. The decline primarily reflected a $398.9 million working-capital outflow, including taxes related to the Chemetall sale and inventory build-up.
- Capital allocation: Nine-month capital expenditures were $187.5 million; dividends paid to shareholders were $105.2 million; and $250.0 million was used for an accelerated share repurchase, retiring 2.34 million shares.
- Cash and debt: Cash and equivalents were $1.045 billion at September 30, 2017, down from $2.270 billion at December 31, 2016. Total debt was $1.790 billion, including $382.3 million of commercial paper; noncurrent debt was $1.407 billion versus $2.122 billion at year-end 2016.
- Liquidity: No borrowings were outstanding under the $1.0 billion revolving credit agreement. The company reported $617.7 million of availability under its commercial paper program and revolving credit agreement, plus $244.7 million under other credit lines, subject to covenants. Management stated that debt covenants were satisfied.
Material changes versus the prior comparable period
- Reported Q3 net income attributable to Albemarle declined 7% because Q3 2016 included $23.2 million of income from discontinued Chemetall operations. Excluding that item, Q3 2017 earnings increased $13.7 million.
- Nine-month reported earnings increased substantially because 2016 included a $357.8 million after-tax loss from discontinued operations, primarily reflecting a noncash tax charge related to the Chemetall divestiture. The 2017 period included a $52.8 million loss on early debt extinguishment and $17.1 million of restructuring and other costs.
- Gross margin for the first nine months declined to 36.3% from 36.8% because of $23.1 million of Jiangli acquisition inventory-markup expense, $12.5 million of acquisition costs and $2.9 million of restructuring costs. Excluding these items, management reported a 38.0% margin versus 37.4% in 2016.
- SG&A increased 29% for the first nine months, reflecting acquisition and restructuring costs, higher compensation, Lithium growth spending and professional fees.
- The Jiangli New Materials acquisition expanded lithium conversion capacity in China. Albemarle also acquired the remaining 50% of Salmag and recorded a preliminary $6.0 million gain, later reduced by $1.4 million in Q3.
Guidance, outlook, risks and unusual items
- Management expected continued strong year-over-year Lithium growth through the remainder of 2017, supported by battery-grade demand, additional conversion capacity and pricing. The company requested an increase in its Chilean lithium quota to support potential production of up to 125,000 metric tons of lithium carbonate equivalent annually; CORFO had not yet ruled on the request.
- Management was optimistic about Bromine Specialties but expected Refining Solutions to face weaker product mix, refinery turnarounds, hurricane Harvey effects and higher input costs.
- 2017 capital expenditures were expected to be approximately $310 million to $350 million, primarily for Lithium growth and capacity increases.
- Management expected a global effective tax rate of approximately 16.7% for 2017, subject to geographic earnings mix and legislative changes.
- Material unusual items included acquisition and integration costs, Jiangli inventory-markup expense, restructuring charges, the debt-extinguishment loss, foreign-exchange effects and hurricane Harvey impacts. The company also adopted accounting guidance that reduced 2017 income tax expense by $2.2 million in Q3 and $6.9 million year to date for excess tax benefits from stock compensation.
- Recorded environmental liabilities were $36.5 million; management estimated potential additional environmental remediation costs of up to approximately $17 million before tax. Bank guarantees and letters of credit totaled approximately $69.4 million.
- Key risks include demand and pricing volatility, raw-material and energy costs, foreign exchange, regulatory and environmental matters, chemical-manufacturing hazards, customer concentration or losses, cyber and operational disruptions, political instability, pension obligations, debt-market access, and execution of acquisitions, divestitures and cost-reduction programs.
Most important facts for an investor to verify
- Whether Lithium pricing, volumes and conversion-capacity expansion continue to offset rising growth spending and working-capital requirements.
- The timing and outcome of CORFO’s decision on the requested Chilean lithium quota.
- Whether Refining Solutions’ weaker volumes, mix, refinery shutdowns and input-cost pressures persist.
- The conversion of reported earnings to cash, particularly after the significant working-capital outflow and planned $310 million to $350 million of 2017 capital expenditures.
- Commercial paper refinancing needs, covenant compliance and the availability of domestic liquidity given that approximately $1.0 billion of cash was held by foreign subsidiaries.
- The final purchase-price accounting for Jiangli and Salmag, and the remaining acquisition, restructuring, tax and environmental contingencies.
- The effect of the planned 2018 PCS and Refining Solutions reorganization on segment comparability and reported results.