Albemarle Corporation — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The financial statements are unaudited. Albemarle operates through Lithium and Advanced Materials, Bromine Specialties, Refining Solutions, and All Other activities.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $722.1 million | $657.2 million | Up 10% |
| Gross profit | $255.1 million | $242.5 million | Up 5% |
| Gross margin | 35.3% | 36.9% | Down 160 bps |
| Operating profit | $122.8 million | $242.8 million | Down 49% |
| Operating margin | 17.0% | 36.9% | Down 1,990 bps |
| Net income attributable to Albemarle | $51.2 million | $228.2 million | Down 78% |
| Diluted EPS from continuing operations | $0.45 | $1.87 | Down 76% |
| Adjusted EBITDA | $211.4 million | $192.0 million | Up 10% |
| Cash flow from operations | $82.6 million | $172.7 million | Down $90.1 million |
Reported profitability was affected by the absence of significant 2016 divestiture gains and discontinued-operations income, a $52.8 million loss on early debt extinguishment, acquisition and integration costs, restructuring charges, inventory fair-value markup utilization, and a higher effective tax rate. Excluding specified unusual items, gross margin was 38.4% in Q1 2017 versus 38.2% in Q1 2016.
- Segment sales: Lithium and Advanced Materials $284.4 million, up 32%; Bromine Specialties $219.2 million, up 12%; Refining Solutions $185.4 million, up 9%; All Other $32.4 million, down 55%.
- Segment adjusted EBITDA: Lithium and Advanced Materials $120.0 million, up 39%; Bromine Specialties $68.5 million, up 11%; Refining Solutions $49.6 million, down 10%.
- Cash and debt: Cash and equivalents were $1.25 billion at March 31, 2017, compared with $2.27 billion at December 31, 2016. Total debt was approximately $1.71 billion, including $314.5 million of commercial paper, versus approximately $2.37 billion at year-end.
- Liquidity: The company reported no borrowings under its $1.0 billion revolving credit facility and approximately $685.5 million of borrowing capacity under its commercial paper program and revolving facility, subject to covenants. Management stated that it was in compliance with debt covenants.
- Capital allocation: The company repurchased 1.95 million shares under a $250 million accelerated share repurchase agreement, paid $34.3 million of dividends, and increased the quarterly dividend 5% to $0.32 per share.
Material changes versus the prior comparable period
- Sales increased primarily from higher volumes and favorable pricing, partially offset by foreign exchange and the prior divestiture of the minerals-based flame retardants and specialty chemicals business.
- Adjusted EBITDA increased despite a $13.1 million increase in corporate adjusted EBITDA loss, primarily because of strong Lithium and Bromine performance.
- Q1 2016 included $121.3 million of net gains on business sales and $17.3 million of after-tax income from discontinued Chemetall operations. These items did not recur in 2017.
- The company repaid the 3.00% senior notes, €307.0 million of 1.875% senior notes, and $174.7 million of 4.50% senior notes using proceeds from the Chemetall divestiture. The repayments generated the $52.8 million debt-extinguishment loss.
- Albemarle completed the acquisition of the remaining 50% of Salmag and terminated Tianqi Lithium’s option to acquire a 20% interest in Rockwood Lithium, leaving Albemarle with 100% ownership of that subsidiary.
- The company adopted share-based payment guidance in 2017, reducing income tax expense by $4.1 million. The quarter also included a $5.1 million out-of-period tax adjustment related to Chilean fixed assets.
Outlook, commentary, risks and unusual items
Management expected continued strong Lithium growth in 2017, supported by battery-grade demand, additional conversion capacity, and price improvement. A Talison joint venture expansion at Greenbushes was approved; commissioning was expected to begin in the second quarter of 2019 and would more than double current lithium carbonate capacity.
Management expected Bromine Specialties to benefit from volume growth and productivity, but remained cautious because of low oil prices, pressure on drilling fluids, and supply-demand conditions in fire safety derivatives. Refining Solutions was expected to benefit from catalyst change-outs and clean-fuels demand, while facing refinery turnarounds, uncertain oil prices, product-mix pressure, and higher input costs.
- Management projected a 2017 effective tax rate of approximately 21%, subject to geographic earnings mix and tax-law changes.
- Expected 2017 capital expenditures were approximately $350 million to $400 million, focused on Lithium growth, capacity increases, productivity, and continuity of operations.
- Restructuring charges totaled $12.9 million, primarily related to cost reductions at a German Lithium site; most of the plan was expected to be completed by year-end 2017.
- The Jiangli acquisition generated $10.6 million of inventory markup expense in the quarter, with approximately $12.4 million of the remaining markup expected to be expensed over the estimated selling period.
- Recorded environmental liabilities were $35.4 million. Management estimated additional potential environmental remediation costs of up to approximately $17 million before tax, although it did not expect such costs to have a material annual consolidated impact.
- Key disclosed risks include economic and end-market conditions, customer demand and concentration, raw-material and energy costs, foreign exchange, regulation, environmental and chemical-manufacturing liabilities, litigation, cybersecurity, political instability, acquisitions and divestitures, and access to financing.
Important facts for investors to verify
- Whether Lithium pricing, battery-grade volumes, and the Greenbushes expansion progress support management’s growth expectations.
- The final share settlement and total shares delivered under the $250 million accelerated share repurchase agreement.
- The effect of debt repayment on future interest expense, liquidity, and refinancing needs, including the $314.5 million commercial-paper balance.
- Whether restructuring, acquisition-related costs, inventory markup utilization, and other unusual charges recur beyond the amounts disclosed.
- The sustainability of the approximately 21% projected tax rate and the impact of foreign earnings, tax legislation, and out-of-period adjustments.
- Potential environmental, litigation, indemnification, product-liability, and regulatory exposures beyond recorded reserves.
- Cash availability in the United States, given that $895.2 million of cash was held by foreign subsidiaries and was primarily intended for use outside the United States.