Albemarle Corporation 2020 Q2 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals producer serving energy storage, petroleum refining, electronics, construction, automotive, pharmaceuticals, crop protection and other markets through its Lithium, Bromine Specialties, Catalysts and fine chemistry services businesses. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $764.0 million | $885.1 million | Down 14% |
| Gross profit / margin | $233.4 million / 30.5% | $325.9 million / 36.8% | Margin down 6.3 points |
| Operating profit | $112.2 million | $185.7 million | Down 40% |
| Net income attributable to Albemarle | $85.6 million | $154.2 million | Down 44% |
| Diluted EPS | $0.80 | $1.45 | Down 45% |
| Adjusted EBITDA | $185.2 million | $261.9 million | Down 29% |
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Net sales | $1.503 billion | $1.717 billion | Down 12% |
| Gross profit / margin | $475.4 million / 31.6% | $609.4 million / 35.5% | Margin down 3.9 points |
| Net income attributable to Albemarle | $192.8 million | $287.8 million | Down 33% |
| Diluted EPS | $1.81 | $2.71 | Down 33% |
| Adjusted EBITDA | $381.6 million | $487.8 million | Down 22% |
Second-quarter sales declines reflected $58.1 million of unfavorable pricing, $56.6 million of lower volume and $6.3 million of unfavorable currency translation. The six-month decline reflected $136.5 million of lower volume, $71.7 million of unfavorable pricing and $5.9 million of unfavorable currency translation.
- Lithium: Q2 sales declined 13% and adjusted EBITDA declined 33%, primarily from lower contract pricing, partly offset by higher hydroxide volume. Six-month sales and adjusted EBITDA declined 16% and 33%, respectively.
- Bromine Specialties: Q2 sales declined 9% and adjusted EBITDA declined 10% on lower pandemic-related demand. Six-month sales declined 8% and adjusted EBITDA declined 2%, partly supported by favorable pricing.
- Catalysts: Q2 sales declined 26% and adjusted EBITDA declined 66%, driven by lower transportation-fuel demand and an approximately $12.0 million net expense related to out-of-period errors. Six-month sales and adjusted EBITDA declined 22% and 45%, respectively.
- All Other: Fine chemistry services sales rose 31% in Q2 and 46% for the six-month period, with adjusted EBITDA increasing 65% and 124%, respectively.
Cash flow from operations was $207.9 million for the first six months of 2020 versus $199.3 million in the prior-year period. Capital expenditures were $419.0 million, and cash used in investing activities was $440.6 million. Cash and cash equivalents increased to $736.7 million at June 30, 2020 from $613.1 million at December 31, 2019, supported by $375.0 million of financing cash inflows, including approximately $450 million of credit-facility borrowings.
Total debt was $3.538 billion at June 30, 2020, compared with $3.050 billion at December 31, 2019. Current debt was $406.2 million and long-term debt, excluding the current portion, was $3.132 billion. The company reported $550.0 million of availability under its commercial paper program and credit agreements, plus $220.4 million under other lines of credit, subject to covenants. Variable-rate borrowings totaled $863.1 million at a weighted-average rate of 1.24%.
Material changes versus the prior comparable period
- COVID-19 significantly reduced demand in Bromine Specialties and Catalysts and contributed to weaker Lithium market conditions, while operations generally remained at normal capacity after temporary first-quarter restrictions in China.
- Albemarle amended its credit agreements on May 11, 2020. The covenant changed to net funded debt to consolidated EBITDA, with a maximum ratio of 4.00:1 for June 30, 2020, 4.50:1 through September 30, 2021, 4.00:1 at December 31, 2021 and 3.50:1 thereafter.
- Interest expense increased 54% in Q2 and 44% for the six-month period because of higher debt associated primarily with the Wodgina acquisition and credit-facility draws.
- The company recorded a $9.8 million second-quarter cost-of-goods-sold expense to correct out-of-period inventory and freight-accrual errors, primarily in Catalysts and Lithium. Management stated the correction was not material to prior periods or the current quarter.
- The Wodgina spodumene mine remained idled pending sufficient demand. Albemarle paid $22.6 million of purchase-price adjustments during the first six months of 2020.
- The quarterly dividend increased 5% to $0.385 per share. A July 14, 2020 declaration provided for another $0.385 dividend payable October 1, 2020.
Guidance, outlook, risks and unusual items
No consolidated numerical earnings guidance is provided in the filing. Management forecast 2020 capital expenditures of approximately $850 million to $950 million, reflecting delays to certain projects to preserve financial flexibility.
- Management expected Lithium results to decline year over year in 2020 because of pricing pressure, lower glass and ceramics demand and slower electric-vehicle production. Long-term lithium demand is viewed favorably, but Wodgina is expected to remain idled until demand improves.
- Management expected Bromine Specialties sales and profitability to decline in 2020, with continued pandemic-related effects likely in the second half.
- Management expected Catalysts sales and profitability to decline in 2020. Some recovery in fuel demand was expected in the second half, but demand was not expected to return to normal during 2020.
- Management is delaying selected capital projects, accelerating cost savings and monitoring multiple economic scenarios. It stated that COVID-19 had not materially affected liquidity as of the filing date, but the ultimate impact remained uncertain.
- At June 30, 2020, the company was in compliance with its amended debt covenant and expected to remain compliant for at least one year from issuance of the interim financial statements. A more severe or prolonged downturn could cause covenant noncompliance, an event of default and potential repayment demands.
- Environmental liabilities totaled $40.8 million, with an estimated additional possible exposure of $10 million to $30 million before tax. The company is also cooperating with DOJ, SEC and Dutch authorities regarding a previously disclosed investigation into potential improper payments by third-party sales representatives; the duration, outcome and costs are not predictable.
- Other unusual items included $6.7 million of second-quarter restructuring expense, $5.5 million of acquisition and integration costs, and foreign-exchange and hedge-related gains and losses. Adjusted EBITDA is a non-GAAP measure and should be evaluated with the accompanying reconciliation.
Important facts for investors to verify
- Assess the duration and severity of COVID-19 effects on automotive, transportation-fuel, refining, electronics and other end-market demand.
- Track lithium pricing, customer inventory levels, hydroxide and carbonate volumes, and the timing of a potential Wodgina restart.
- Reconcile debt maturities, commercial paper refinancing needs, credit-facility availability and compliance with the amended leverage covenant.
- Compare planned capital expenditures of $850 million to $950 million with operating cash generation and project delays.
- Monitor the DOJ, SEC and Dutch Public Prosecutor investigations and the potential environmental remediation range.
- Separate GAAP earnings from adjusted EBITDA and quantify the effect of restructuring, acquisition, error-correction, currency and other unusual items.