Albemarle Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Albemarle is a global specialty chemicals producer operating through Performance Chemicals, Refining Solutions and Chemetall Surface Treatment, plus businesses classified as All Other.
The January 12, 2015 acquisition of Rockwood Holdings for approximately $5.7 billion materially changed the scale and composition of the company. Rockwood results are included from January 13, 2015; 2014 segment information was recast for comparability.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $905.1 million | $642.4 million | $2.721 billion | $1.847 billion |
| Gross profit | $312.2 million | $205.4 million | $871.2 million | $608.4 million |
| Gross margin | 34.5% | 32.0% | 32.0% | 32.9% |
| Operating profit | $113.3 million | $106.5 million | $253.3 million | $294.6 million |
| Operating margin | 12.5% | 16.6% | 9.3% | 16.0% |
| Net income attributable to Albemarle | $65.4 million | $72.8 million | $160.7 million | $151.8 million |
| Diluted EPS from continuing operations | $0.58 | $1.01 | $1.44 | $2.78 |
| Adjusted EBITDA | $235.0 million | $144.6 million | $730.7 million | $425.3 million |
| Cash flow from operations | $183.7 million | Approximately $135 million | $316.9 million | $430.5 million |
Q3 sales increased 41%, driven mainly by $359.8 million of Rockwood-related sales. Excluding Rockwood, sales declined $97.1 million because of unfavorable currency translation and volumes, partly offset by pricing. Q3 gross margin improved, but higher SG&A, acquisition costs, interest expense and taxes reduced operating and net margins.
Nine-month sales increased 47%, while operating profit declined 14% and continuing-operations net income declined 27%. Reported net income attributable to Albemarle increased 6% because 2014 included a $68.5 million after-tax loss from discontinued operations. The company reported $730.7 million of adjusted EBITDA, a non-GAAP measure, up 72% year over year.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $234.5 million at September 30, 2015, down from $2.490 billion at December 31, 2014, primarily because of the Rockwood acquisition.
- Nine-month operating cash flow was $316.9 million, compared with $430.5 million in 2014. Investing cash flow was an outflow of $2.100 billion, including $2.052 billion for Rockwood and $164.6 million of capital expenditures.
- Total long-term debt was $3.843 billion, including $284.4 million classified as current; the noncurrent portion was $3.559 billion versus $2.223 billion at year-end 2014.
- Commercial paper outstanding was $273.0 million, with a weighted-average interest rate of approximately 0.84% and weighted-average maturity of 21 days. The company reported $727.0 million of availability under its commercial paper program and revolving credit facility, subject to covenants.
- The company stated that it was in compliance with debt covenants and expected cash on hand, operating cash flow, divestiture proceeds and borrowings to fund operations, debt service, capital spending, pensions and dividends.
- Capital expenditures were expected to approximate $234 million for 2015. The quarterly dividend was increased 5% to $0.29 per share.
Material changes versus the prior comparable period
- Rockwood added substantial lithium, surface treatment and other specialty chemicals operations. Q3 Rockwood businesses contributed approximately $359.8 million of sales and $18.2 million of net income attributable to Albemarle; nine-month contributions were approximately $1.1 billion and $43.9 million.
- Acquisition and integration costs rose to $42.8 million in Q3 and $126.5 million for nine months, including $120.5 million directly related to Rockwood for the nine-month period. Management estimated approximately $80 million of additional such costs through 2016.
- Interest and financing expense increased to $32.1 million in Q3 and $101.0 million for nine months due mainly to acquisition-related borrowings.
- Performance Chemicals Q3 sales and adjusted EBITDA increased 33% and 65%, respectively. Refining Solutions sales and adjusted EBITDA declined 15% and 12%. Chemetall contributed $211.9 million of sales and $53.9 million of adjusted EBITDA. All Other sales and adjusted EBITDA declined 17% and 70%.
- Foreign currency translation produced a $365.9 million nine-month other comprehensive loss, contributing to accumulated other comprehensive loss of $386.4 million at September 30, 2015.
- A $6.8 million pretax gain from the sale of Avonmouth land partially offset restructuring expenses. Rockwood purchase accounting also created approximately $103 million of inventory markup, with $102.3 million recognized through nine months.
Guidance, outlook, risks and unusual items
- Management expected a 2015 global effective tax rate of approximately 20.4%; the nine-month effective rate was 23.7%.
- Management emphasized deleveraging, Rockwood integration and synergies, cost control, working-capital management and portfolio optimization. It stated that synergy expectations were on track.
- Near-term headwinds include slow and uneven global growth, a strong U.S. dollar, lower crude oil prices, cautious customer inventories, weaker demand in selected products, pricing pressure and market volatility.
- The company planned to pursue strategic alternatives for Minerals, Fine Chemistry Services and Metal Sulfides, with proceeds intended to reduce borrowings. Subsequent to quarter-end, Minerals assets and the Tribotecc Metal Sulfides business were expected to be classified as held for sale; combined net assets were approximately $225 million at September 30.
- On October 15, 2015, the company redeemed Rockwood’s $1.25 billion 4.625% senior notes at a premium of approximately $43.3 million and funded the repayment with $1.25 billion of new term loans. A fourth-quarter loss on extinguishment of approximately $5.4 million was expected.
- An appraisal action by former Rockwood shareholders remains pending. The company recorded a $74.9 million estimated liability, but the outcome cannot be predicted.
- Recorded environmental liabilities were $39.3 million, with reasonably possible additional remediation costs estimated at up to approximately $22 million before tax. Uncertain tax positions totaled $104.1 million, and management indicated that a material change could occur within twelve months but was not currently estimable.
- The company identified risks from chemicals manufacturing, environmental and product liability, raw-material and energy costs, foreign exchange, interest rates, customer demand, regulation, litigation, pension obligations, debt-market access and the ability to integrate Rockwood and realize synergies.
Most important facts for investors to verify
- Rockwood integration progress, realized synergies and remaining acquisition-related costs.
- Deleveraging pace, post-quarter-end term-loan balances, covenant compliance and refinancing needs.
- Cash generation after acquisition spending, capital expenditures, dividends and working-capital requirements.
- Performance of lithium and Chemetall versus weakness in Refining Solutions and All Other businesses.
- Effects of currency movements, lower oil prices, pricing pressure and customer inventory management.
- Resolution and potential value of the Rockwood appraisal litigation and environmental or tax contingencies.
- Timing, proceeds and debt-reduction impact of planned divestitures and held-for-sale assets.