Albemarle Corporation — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Albemarle is a global specialty chemicals producer serving lithium, energy storage, petroleum refining, fire safety, electronics, automotive, construction, pharmaceutical, crop protection and other markets. Reportable segments were Lithium and Advanced Materials, Bromine Specialties and Refining Solutions.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $2.677 billion | $2.826 billion | (5%) |
| Gross profit | $970.6 million | $860.2 million | 13% |
| Gross margin | 36.3% | 30.4% | +590 bps |
| Operating profit | $574.6 million | $345.1 million | 66% |
| Operating margin | 21.5% | 12.2% | +930 bps |
| Net income from continuing operations | $478.6 million | $327.6 million | 46% |
| Net income attributable to Albemarle | $643.7 million | $334.9 million | 92% |
| Diluted EPS from continuing operations | $3.90 | $2.71 | 44% |
| Diluted EPS | $5.68 | $3.00 | 89% |
| Adjusted EBITDA | $758.2 million | $756.0 million | Approximately flat |
| Cash flow from operations | $733.4 million | $360.7 million | 103% |
| Capital expenditures | $196.7 million | $227.6 million | (14%) |
Segment Performance
| Segment | 2016 Sales | Sales Change | 2016 Adjusted EBITDA | EBITDA Change |
|---|---|---|---|---|
| Lithium and Advanced Materials | $968.2 million | 16% | $363.4 million | 16% |
| Bromine Specialties | $792.4 million | 2% | $226.9 million | 2% |
| Refining Solutions | $732.1 million | 0.4% | $239.0 million | 21% |
| All Other | $181.0 million | (62%) | $14.8 million | (73%) |
Lithium benefited from higher battery-grade volumes and pricing. Refining Solutions improved on increased hydroprocessing catalyst change-outs, better product mix and cost reductions. Bromine performance benefited from volume growth and lower costs, partly offset by pricing pressure. All Other declined primarily because of divestitures and weaker fine chemistry services.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $2.270 billion at December 31, 2016, compared with $213.7 million at year-end 2015; $846.4 million was held by foreign subsidiaries.
- Total debt was approximately $2.369 billion, including $247.5 million of commercial paper and $2.122 billion of noncurrent debt. Noncurrent debt declined from $3.142 billion in 2015.
- The Company repaid the $1.25 billion September 2015 term loan and approximately $153 million of commercial paper using divestiture proceeds.
- The revolving credit facility provides up to $1.0 billion and had no borrowings outstanding at year-end. The Company reported approximately $752.5 million of borrowing capacity under the commercial paper program and revolving facility.
- Operating cash flow funded debt repayment, $196.7 million of capital expenditures, $135.4 million of shareholder dividends and $20.1 million of pension and postretirement contributions.
- Management expected approximately $375 million of 2017 capital expenditures, primarily for lithium growth and capacity expansion, productivity and continuity projects.
Material Changes and Unusual Items
- Albemarle sold the Chemetall Surface Treatment business to BASF on December 14, 2016 for approximately $3.1 billion in net cash proceeds. The transaction generated a $388.0 million pretax gain and $135.0 million after-tax gain and was reported in discontinued operations.
- Other 2016 divestitures included the metal sulfides business for approximately $137 million and the minerals-based flame retardants and specialty chemicals business for approximately $187 million. Pretax gains were $11.5 million and $112.3 million, respectively.
- The Company acquired lithium carbonate and lithium hydroxide conversion assets in China for approximately $145 million on December 31, 2016. The preliminary allocation included approximately $113.6 million of goodwill.
- Reported 2016 earnings included an $18.3 million after-tax pension and other postretirement actuarial loss, compared with a $21.4 million after-tax actuarial gain in 2015.
- 2016 acquisition and integration costs were $57.4 million, compared with $132.3 million in 2015. The 2015 period also included $83.0 million of Rockwood purchase-accounting inventory markup utilization.
- Fourth-quarter 2016 net income attributable to Albemarle was $602.1 million, including a $559.97 million contribution from discontinued operations, primarily the Chemetall sale. Fourth-quarter continuing-operations income was $50.3 million.
Guidance, Outlook and Risks
- Management expected strong 2017 lithium growth, led by battery-grade applications and continued pricing improvement.
- Management expected PCS profitability to stabilize, although excess supply, unfavorable pricing and additional effects from a customer bankruptcy were expected to remain headwinds.
- Bromine Specialties was expected to deliver relatively flat 2017 sales and profitability, with low but stable drilling-completion-fluid demand under sustained low oil prices.
- Refining Solutions was expected to benefit from catalyst change-outs and product mix, while scheduled refinery maintenance and higher raw-material costs could weigh on results.
- Management expected a 2017 global effective tax rate of approximately 22%, subject to geographic earnings mix and tax-law changes, and increased the quarterly dividend to $0.32 per share.
- Principal risks include cyclical customer markets, lithium and bromine resource access, raw-material and energy price volatility, inability to pass through costs, foreign exchange, competition, chemical and environmental regulation, product liability, cybersecurity, geopolitical exposure, pension funding and debt covenant or refinancing risk.
- Environmental liabilities recorded were $34.9 million; management estimated reasonably possible additional remediation costs of up to approximately $16 million before tax.
- The Company reported effective internal control over financial reporting, with Jiangxi Jiangli Lithium excluded from management’s and the auditor’s assessment because it was acquired during 2016.
Investor Verification Checklist
- Reconcile continuing-operations performance with reported consolidated earnings, particularly the $202.1 million of after-tax discontinued-operations income and the Chemetall sale gain.
- Review the post-closing debt position after additional senior-note repayments made through February 2017.
- Assess whether lithium volume growth, pricing and the expanded Chilean production quota support the planned 2017 capital investment.
- Evaluate the sustainability of the 36.3% gross margin and $758.2 million adjusted EBITDA after excluding divestiture effects and unusual items.
- Monitor PCS customer-credit exposure, bromine pricing, refining catalyst demand and raw-material costs.
- Review foreign cash restrictions, indefinitely reinvested foreign earnings of approximately $3.6 billion and related potential tax exposure.
- Examine environmental, tax, pension, product-guarantee and indemnification contingencies, including the $51.3 million of letters of credit and guarantees.