Business Context and Reporting Period
Albemarle Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company develops and manufactures specialty chemicals through its Lithium, Bromine Specialties and Catalysts segments, with additional fine chemistry services reported in All Other.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $879.7 million | $777.7 million | $2.597 billion | $2.453 billion |
| Gross profit | $309.9 million | $280.5 million | $919.3 million | $896.9 million |
| Gross margin | 35.2% | 36.1% | 35.4% | 36.6% |
| Net income attributable to Albemarle | $155.1 million | $129.7 million | $442.8 million | $564.0 million |
| Diluted EPS | $1.46 | $1.20 | $4.16 | $5.11 |
| Adjusted EBITDA | $254.4 million | $235.1 million | $742.1 million | $742.4 million |
- Q3 sales increased 13%, driven by $91.6 million of higher volume and $17.9 million of favorable pricing, partially offset by $7.6 million of unfavorable currency effects.
- Q3 net income attributable to Albemarle increased 20%, while diluted EPS increased 22%. The effective tax rate declined to 15.5% from 21.5%, primarily because of geographic earnings mix.
- Nine-month net income and EPS declined 21% and 19%, respectively, principally because 2018 included the after-tax gain from the Polyolefin Catalysts Divestiture.
- Nine-month adjusted EBITDA was essentially unchanged year over year. Bromine Specialties growth and All Other gains offset lower Catalysts results, higher Corporate costs and broadly flat Lithium EBITDA.
- Operating cash flow was $345.6 million for the first nine months, compared with $376.9 million in 2018. Capital expenditures were $608.5 million, and management expected full-year 2019 capital expenditures of approximately $900 million to $950 million.
- Cash and cash equivalents were $317.8 million at September 30, 2019, down from $555.3 million at December 31, 2018. Working capital outflows were $289.6 million, primarily from inventory growth and receivable-collection timing.
- Total debt was $1.922 billion, including $539.3 million of commercial paper classified as current debt. The company had $1.66 billion of availability under its commercial paper program and credit agreements, plus $286.7 million under other credit lines.
- Net property, plant and equipment increased to $3.524 billion from $3.021 billion at year-end 2018, reflecting substantial capital investment. Inventory increased to $802.4 million from $700.5 million.
Material Changes Versus the Prior Comparable Period
- Lithium Q3 sales rose 22% and adjusted EBITDA rose 12%, primarily from higher battery-grade salt volumes and favorable lithium hydroxide pricing. Higher tolling costs, operating issues at La Negra, Chile, and a $7.0 million out-of-period non-cash inventory adjustment reduced profitability.
- Bromine Specialties Q3 sales increased 10% and adjusted EBITDA increased 13%, supported by pricing and volume growth in flame retardants and other derivatives.
- Catalysts Q3 sales increased 4% and adjusted EBITDA increased 7%, reflecting higher Clean Fuel Technology volume and favorable mix, partly offset by FCC unit start-up delays, unfavorable pricing and currency effects.
- For the first nine months, Catalysts sales declined 2% and adjusted EBITDA declined 6%, partly because 2018 included the divested Polyolefin Catalysts business and a 2018 insurance reimbursement.
- Gross margins declined year over year because of higher Lithium tolling and input costs, higher Bromine Specialties and Catalysts raw-material costs, currency effects and the Q3 inventory adjustment.
- Foreign currency translation produced an $85.4 million net-of-tax reduction in comprehensive income during the first nine months, increasing accumulated other comprehensive loss to $436.0 million.
- Effective January 1, 2019, Albemarle adopted the new lease standard, recording approximately $139.1 million of additional net lease assets and lease liabilities without an impact on net income or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expected strong Lithium year-over-year growth for the remainder of 2019, led by battery-grade demand and increased conversion capacity, but anticipated pricing pressure and continued use of tolled volume.
- Management expected continued 2019 growth in Bromine Specialties sales and profitability, while drilling-completion-fluid demand was expected to remain stable but low under sustained low oil prices.
- Management viewed Catalysts as positioned for longer-term growth from cleaner-fuel requirements, refinery start-ups and demand for technologies supporting heavier feedstocks and higher propylene yields.
- Management expected a 2019 global effective tax rate of 18% to 19%, subject to geographic earnings mix and tax-law changes.
- On October 31, 2019, after the reporting date, Albemarle completed the acquisition of a 60% interest in the Wodgina lithium project for $1.3 billion, consisting of $820 million cash and a transferred 40% interest in certain Kemerton conversion assets valued at $480 million. The cash portion was funded with $1.0 billion borrowed under the new credit facility.
- Albemarle had a $1.2 billion unsecured credit facility entered into in August 2019; no borrowings were outstanding at September 30, 2019. The company subsequently borrowed under the facility for the Wodgina transaction.
- Environmental liabilities totaled $44.8 million at September 30, 2019. Management estimated an additional possible exposure of $10 million to $30 million before tax, primarily related to a formerly owned site.
- The company continued to cooperate with the DOJ, SEC and Dutch Public Prosecutor regarding potential improper payments by third-party sales representatives in the Refining Solutions business. The duration, outcome and costs were not determinable.
- Other risks include lithium pricing and capacity execution, raw-material and energy costs, foreign exchange, global economic conditions, regulatory and environmental matters, cyber incidents, chemical-manufacturing hazards, litigation and acquisition integration.
Facts an Investor Should Verify
- Impact of the Wodgina acquisition, new debt and related joint venture on fourth-quarter 2019 results, leverage and covenant compliance.
- Whether Lithium pricing pressure, tolling costs and La Negra operating issues persist or improve.
- Conversion of elevated inventory and receivables into cash and progress toward the $900 million to $950 million 2019 capital-expenditure plan.
- Underlying earnings excluding the 2018 Polyolefin Catalysts Divestiture gain and other unusual items, including the $7.0 million inventory adjustment and 2018 legal, environmental and charitable charges.
- Resolution, potential penalties and financial impact of the DOJ, SEC and Dutch Public Prosecutor investigations.
- Environmental remediation exposure above the $44.8 million recorded liability and the estimated $10 million to $30 million additional possible cost.
- Currency sensitivity, including the $1.11 billion notional foreign-exchange forward portfolio and the material accumulated translation losses.