Albemarle Corporation — Q3 2018 Form 10-Q Summary
Business Context and Reporting Period
Albemarle is a global specialty chemicals producer serving energy storage, refining, electronics, construction, automotive, pharmaceuticals, crop protection and other markets. The filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Reportable segments are Lithium, Bromine Specialties and Catalysts; 2017 segment results were recast following the combination of Performance Catalyst Solutions with Refining Solutions.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Net sales | $777.7 million | $754.9 million | Up 3% |
| Gross profit / margin | $280.5 million / 36.1% | $275.7 million / 36.5% | Profit up 2%; margin down 40 bps |
| Operating profit / margin | $163.8 million / 21.1% | $147.4 million / 19.5% | Profit up 11% |
| Net income attributable to Albemarle | $129.7 million | $118.7 million | Up 9% |
| Diluted EPS | $1.20 | $1.06 | Up 13% |
| Adjusted EBITDA | $235.1 million | $209.4 million | Up 12% |
| Operating cash flow | $153.1 million | $129.3 million | Up $23.8 million |
| Metric | Nine months 2018 | Nine months 2017 | Change |
|---|---|---|---|
| Net sales | $2.453 billion | $2.214 billion | Up 11% |
| Gross profit / margin | $896.9 million / 36.6% | $802.6 million / 36.2% | Profit up 12%; margin up 40 bps |
| Operating profit / margin | $736.7 million / 30.0% | $407.2 million / 18.4% | Profit up 81% |
| Net income attributable to Albemarle | $564.0 million | $273.2 million | Up 106% |
| Diluted EPS | $5.11 | $2.43 | Up 110% |
| Adjusted EBITDA | $742.4 million | $639.7 million | Up 16% |
| Operating cash flow | $376.9 million | $74.8 million | Up $302.1 million |
At September 30, 2018, cash and cash equivalents were $641.2 million, down from $1.137 billion at December 31, 2017. Total debt was $1.698 billion, including $286.2 million classified as current debt; long-term debt excluding the current portion was $1.412 billion. The company had no borrowings under its new $1.0 billion revolving credit facility and reported $714.5 million of borrowing capacity under the commercial paper program and revolving facility, subject to covenants. Net current assets were $932.6 million.
Capital expenditures were $471.7 million during the first nine months, and management expected full-year 2018 capital expenditures of approximately $800 million to $900 million, primarily for Lithium growth and capacity expansion. The company declared a quarterly dividend of $0.335 per share and repurchased $500.0 million of stock under two accelerated share repurchase agreements, retiring approximately 4.7 million shares through September 30.
Material Changes Versus the Prior Comparable Period
- Q3 sales growth reflected $38.4 million of favorable pricing and $31.4 million of higher volumes in Catalysts and Bromine Specialties, partly offset by $14.0 million of lower Lithium volumes from unexpected site shutdowns and $27.0 million attributable to the divestiture of the polyolefin catalysts and components business.
- Lithium Q3 sales increased 1% to $270.9 million and adjusted EBITDA increased 1% to $113.6 million. Nine-month sales increased 22% to $886.5 million and adjusted EBITDA increased 18% to $386.3 million.
- Bromine Specialties Q3 sales increased 9% and adjusted EBITDA increased 23%, driven by pricing and demand. Catalysts Q3 sales increased 3% and adjusted EBITDA increased 4%, despite higher raw-material costs and the divestiture.
- On April 3, 2018, Albemarle sold the polyolefin catalysts and components business to W.R. Grace for approximately $413.5 million in net cash proceeds and recognized a $218.7 million pretax gain.
- Nine-month results benefited from the divestiture gain, lower interest expense compared with 2017, favorable pricing and volume, and the absence of the $52.8 million loss on early extinguishment of debt recorded in 2017.
- Nine-month results also included $27.0 million of legal accruals, $15.6 million of environmental charges, and $16.2 million of additional charitable contributions. Foreign currency translation produced an $88.6 million after-tax comprehensive loss versus $163.3 million of income in 2017.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued strong Lithium growth through the remainder of 2018, supported by battery-grade demand, pricing and increased conversion capacity. Long-term demand is linked to electric vehicles, energy storage and declining battery costs.
- Management expected continued 2018 growth in Bromine Specialties, while drilling completion-fluid demand was expected to remain stable at low levels because of sustained low oil prices.
- Catalysts faced continued raw-material cost pressure, although management cited longer-term support from cleaner-fuel requirements, refinery start-ups and demand for catalyst technology.
- Management expected a 2018 global effective tax rate of approximately 23%, subject to geographic earnings mix, the U.S. Tax Cuts and Jobs Act and legislative changes.
- Environmental liabilities totaled $52.8 million at September 30, 2018. Management estimated an additional possible exposure of $10 million to $25 million before tax beyond recorded amounts, although timing is uncertain.
- Albemarle voluntarily self-reported potential improper payments involving third-party sales representatives in its Refining Solutions business to the DOJ and SEC. The duration, scope, outcome and costs of the investigations could not be predicted.
- Market risks include foreign currency volatility, raw-material and energy costs, interest rates, global economic conditions, regulatory changes, chemical manufacturing hazards, litigation, environmental obligations, cyber risks and political instability.
- The filing states that the company was in compliance with its debt covenants and that no material changes occurred in previously disclosed risk factors.
Key Facts an Investor Should Verify
- Whether Lithium site shutdowns, capacity expansions and higher royalty costs affect fourth-quarter volumes and margins.
- Whether the $800 million to $900 million capital-spending expectation remains appropriate and how it affects free cash flow and leverage.
- The final share settlement under the August 2018 $250 million ASR agreement and the remaining repurchase authorization.
- The ultimate financial and regulatory consequences of the DOJ and SEC review concerning third-party sales representatives.
- Changes in environmental remediation estimates, legal accruals and potential costs beyond recorded liabilities.
- The sustainability of pricing gains amid rising raw-material, production and freight costs.
- The portion of cash held by foreign subsidiaries and the potential effect of repatriation, tax law and foreign-exchange changes on liquidity.
- The impact of the planned January 1, 2019 lease-accounting adoption; the filing states that the materiality of the balance-sheet impact had not yet been determined.