Albemarle Corporation — Q3 2020 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals producer serving energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection and custom chemistry markets. Its reportable segments are Lithium, Bromine Specialties and Catalysts; Fine Chemistry Services is reported in All Other.
This unaudited filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results reflect COVID-19-related demand disruption, lithium pricing pressure and continued investment in lithium capacity. The Wodgina spodumene mine remained idled pending stronger demand.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net sales | $746.9 million | $879.7 million | Down 15% |
| Gross profit | $254.1 million | $309.9 million | Down 18% |
| Gross margin | 34.0% | 35.2% | Down 120 bps |
| Operating profit | $144.4 million | $186.1 million | Down 22% |
| Net income attributable to Albemarle | $98.3 million | $155.1 million | Down 37% |
| Diluted EPS | $0.92 | $1.46 | Down 37% |
| Adjusted EBITDA | $216.1 million | $254.4 million | Down 15% |
| Operating cash flow | $253.8 million | Approximately $146.7 million | Up 73% |
Nine-month 2020 net sales were $2.250 billion, down 13%; gross profit was $729.4 million, down 21%, with a 32.4% gross margin versus 35.4%; net income attributable to Albemarle was $291.1 million, down 34%; diluted EPS was $2.73 versus $4.16; and adjusted EBITDA was $597.6 million, down 19%.
Q3 segment results were: Lithium sales of $265.6 million, down 20%, and adjusted EBITDA of $97.8 million, down 23%; Bromine Specialties sales of $237.2 million, down 7%, and adjusted EBITDA of $79.4 million, down 11%; Catalysts sales of $197.9 million, down 24%, and adjusted EBITDA of $37.8 million, down 43%; and All Other sales of $46.1 million, up 45%, with adjusted EBITDA of $25.0 million, up 139%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $461.7 million versus $345.6 million in 2019. The improvement primarily reflected lower working-capital outflows, partly offset by lower earnings and dividends from unconsolidated investments.
- Capital expenditures were $621.4 million through September 30, 2020. Management forecast full-year capital expenditures of approximately $850 million to $900 million, including delays to certain projects to preserve flexibility.
- Cash and cash equivalents were $702.1 million at September 30, 2020, up from $613.1 million at December 31, 2019. Approximately $517.5 million was held by foreign subsidiaries.
- Total debt was approximately $3.544 billion, including $603.8 million classified as current and $2.941 billion long-term. Commercial paper outstanding was $390.0 million with a weighted-average maturity of 46 days.
- The company had approximately $610.0 million of availability under its commercial paper program and Credit Agreements, plus $222.9 million under other existing lines of credit, subject to covenants.
- Albemarle amended its credit agreements in May 2020, including changing the covenant to net funded debt to EBITDA and permitting a ratio of up to 4.50:1 through September 30, 2021. The company reported compliance at September 30, 2020 and expected compliance for at least one year from issuance of the interim financial statements.
- The quarterly dividend was increased 5% to $0.385 per share. A dividend declared in July was paid October 1, 2020.
Material changes versus the prior comparable period
- Q3 sales declined $132.9 million, driven by $68.5 million of unfavorable pricing and $68.3 million of lower volume, partly offset by $3.7 million of favorable currency translation.
- Lithium was affected by lower contract pricing for battery- and technology-grade carbonate and hydroxide and lower battery-grade volumes. Nine-month Lithium adjusted EBITDA declined 30%.
- Bromine Specialties experienced lower demand related to COVID-19 shutdowns. Catalysts was most affected by reduced transportation fuel demand, with Q3 adjusted EBITDA down 43% and nine-month adjusted EBITDA down 44%.
- Interest expense increased 73% in Q3 and 53% for the nine-month period because of higher debt associated primarily with the Wodgina acquisition and credit-facility borrowings.
- SG&A declined due to productivity improvements, lower professional fees and cost savings, but included severance, acquisition-related costs and increased environmental reserves.
- Cash generation improved despite lower earnings, while capital expenditures remained high. Inventory increased to $828.1 million from $769.0 million at year-end 2019, partly to support anticipated sales.
- Other comprehensive income improved substantially because of favorable foreign-currency translation, compared with a significant loss in the 2019 quarter.
Guidance, outlook, risks and unusual items
- Management expected Lithium results to decline year over year in 2020 because of pricing pressure and reduced glass and ceramics demand. No significant new capacity was expected in 2020 or 2021; long-term lithium demand was supported by electric vehicles, grid storage and battery-cost trends.
- Management expected Bromine Specialties sales and profitability to decline in 2020 and anticipated continued COVID-19-related effects into 2021.
- Management expected Catalysts sales and profitability to decline in 2020. Transportation-fuel demand had begun recovering, but management did not expect demand to return to normal until late 2022 at the earliest.
- Management expected to record a fourth-quarter 2020 mark-to-market actuarial loss of approximately $50 million related to pension and postretirement obligations, subject to changes in discount rates and other assumptions.
- COVID-19 could reduce demand, disrupt suppliers and customers, impair cash flow and cause goodwill, intangible-asset or other long-lived-asset impairments. A more severe or prolonged downturn could impair covenant compliance and potentially trigger debt repayment requirements.
- Environmental liabilities totaled $45.3 million at September 30, 2020. Management estimated an additional possible exposure of $10 million to $30 million before tax beyond recorded amounts, primarily related to a formerly owned site with indemnity obligations through 2024.
- The company continued cooperating with the DOJ, SEC and Dutch Public Prosecutor regarding potential improper payments by third-party sales representatives in its Refining Solutions business. The duration, outcome and costs were not estimable.
- Albemarle was pursuing potential divestitures of its PCS and Fine Chemistry Services businesses. It also continued construction and investment programs in Australia and Chile, including Kemerton and La Negra.
- Adjusted EBITDA is a non-GAAP measure and should be evaluated alongside U.S. GAAP net income and cash flow.
Most important facts for an investor to verify
- Whether lithium pricing, customer inventories and electric-vehicle demand improve sufficiently to support volume growth and restart of Wodgina.
- Progress toward the $850 million to $900 million 2020 capital-expenditure plan and the timing and cost of Kemerton and La Negra projects.
- Compliance with the amended net funded debt-to-EBITDA covenant as COVID-19 effects and earnings recovery develop.
- The maturity and refinancing requirements for $603.8 million of current debt, including $390.0 million of commercial paper.
- The outcome and potential financial impact of the DOJ, SEC and Dutch Public Prosecutor investigations.
- Updates to environmental remediation estimates, pension mark-to-market losses and potential impairment indicators.
- Actual progress and valuation of proposed PCS and Fine Chemistry Services divestitures.