Albemarle Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. Albemarle is a global specialty chemicals producer serving lithium, bromine, catalysts, refining, surface treatment and related markets. Results include Rockwood Holdings from January 13, 2015, following the approximately $5.7 billion acquisition completed January 12, 2015.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $931.5 million, up 54% | $1.816 billion, up 51% |
| Gross profit / margin | $300.6 million / 32.3% | $559.0 million / 30.8% |
| Operating profit / margin | $103.4 million / 11.1% | $140.0 million / 7.7% |
| Net income from continuing operations | $59.4 million | $106.5 million |
| Net income attributable to Albemarle | $52.1 million | $95.3 million |
| Diluted EPS from continuing operations | $0.46 | $0.86 |
| Adjusted EBITDA | $230.1 million | $495.7 million |
| Cash flow from operations | $87.4 million | $133.2 million |
Six-month operating cash flow declined from $295.1 million in 2014. Capital expenditures were $111.7 million, acquisition spending was $2.1 billion, and cash dividends paid to shareholders were $54.2 million.
Cash and cash equivalents were $207.2 million at June 30, 2015, down from $2.490 billion at December 31, 2014. Total debt was $3.990 billion, including $428.0 million classified as current; noncurrent debt was $3.562 billion. Commercial paper outstanding was $418.4 million, with a weighted-average interest rate of approximately 0.96% and maturity of 20 days. The company reported $581.6 million of borrowing capacity under its commercial paper program and revolving credit agreement, plus $141.6 million under other lines of credit, subject to covenants.
Working capital and liquidity were materially affected by the Rockwood acquisition and related debt repayments. Management stated that cash, operating cash flow, divestiture proceeds and borrowing capacity should be sufficient for operating needs, debt service, capital expenditures, pension contributions and dividends.
Material changes versus the prior comparable periods
- Reported sales increased substantially because Rockwood contributed approximately $363.8 million in second-quarter sales and $692.5 million in first-half sales. Excluding Rockwood, sales decreased $37.0 million in the quarter and $81.2 million in the first half, primarily because of unfavorable currency, pricing and volume effects.
- Gross margins declined from 34.3% to 32.3% in the quarter and from 33.5% to 30.8% in the first half. Results included $37.3 million of second-quarter and $85.5 million of first-half charges related to the utilization of Rockwood purchase-accounting inventory markups.
- Operating profit declined 6% in the quarter and 26% in the first half. Higher SG&A, substantially higher interest expense and acquisition-related costs more than offset acquired earnings and higher sales.
- Interest and financing expense increased to $33.2 million in the quarter and $68.9 million in the first half, primarily because of acquisition-related borrowings.
- Acquisition and integration costs were $24.2 million in the quarter and $83.7 million in the first half, including $21.3 million and $78.7 million, respectively, related directly to Rockwood. Management estimated additional Rockwood integration costs of approximately $121 million through 2016.
- Net income attributable to Albemarle increased because the 2014 periods included a $60.0 million quarterly and $61.8 million first-half loss from discontinued operations related to the sale of the antioxidant, ibuprofen and propofol businesses. Continuing-operations EPS nevertheless declined 56% in the quarter and 51% in the first half.
- Performance Chemicals adjusted EBITDA increased 93% in the quarter and 86% in the first half. Refining Solutions adjusted EBITDA declined 28% and 29%, respectively, primarily from lower volumes, pricing or mix and currency effects. Chemetall Surface Treatment contributed $48.4 million of quarterly and $94.4 million of first-half adjusted EBITDA.
Guidance, outlook, commentary and risks
- Management expects 2015 capital expenditures to approximate 6% of revenue.
- Management expects a 2015 global effective tax rate of approximately 21.6%, subject to geographic earnings mix and tax-law changes.
- Management’s principal financial objective following the Rockwood transaction is deleveraging, supported by operating cash flow, planned divestitures and synergies. The company stated that it was on track with expectations for Rockwood synergies.
- The company intends to pursue strategic alternatives for Minerals, Fine Chemistry Services and Metal Sulfides, classified in “All Other,” with proceeds expected to reduce acquisition-related debt. Timing and proceeds are uncertain.
- Near-term challenges include uneven global growth, a stronger U.S. dollar, lower crude oil prices, weak or cautious customer demand, pricing pressure, currency volatility, raw-material and energy costs, competition and changing refinery feedstocks.
- The company assumed substantial goodwill, intangible assets, pension obligations, environmental liabilities and other contingencies in the Rockwood acquisition. Purchase price allocations remained preliminary and could change, potentially affecting amortization or impairment risk.
- A shareholder class-action settlement relating to the merger was approved July 30, 2015, and the Delaware consolidated action was dismissed with prejudice on August 5, 2015. A separate appraisal proceeding involving approximately 882,000 former Rockwood shares remained pending, with a $74.9 million estimated liability recorded and trial scheduled for June 27, 2016.
- Recorded environmental liabilities were $37.8 million at June 30, 2015; management estimated possible additional remediation costs of up to approximately $22 million before tax. Off-balance-sheet bank guarantees and letters of credit totaled approximately $59.6 million.
- The company reported effective disclosure controls and stated that integration of Rockwood’s controls is expected to be completed by the first anniversary of the acquisition.
Most important facts for investors to verify
- Progress toward deleveraging, including debt reduction, commercial paper refinancing and compliance with the amended leverage covenant.
- Actual Rockwood synergies and the remaining approximately $121 million of estimated integration costs through 2016.
- Whether gross-margin pressure from inventory-markup amortization, currency, pricing and product mix is temporary or structural.
- Timing and valuation of planned divestitures and the amount of debt reduction they generate.
- Performance of Lithium, Bromine, Refining Solutions and Chemetall Surface Treatment under lower oil prices and continued currency volatility.
- Finalization of Rockwood purchase accounting, including goodwill, intangible assets, pension obligations, tax liabilities and environmental contingencies.
- Outcome and potential cash impact of the outstanding appraisal proceeding, as well as any other acquired Rockwood contingencies.