Albemarle Corporation: Q3 2014 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. Albemarle operates through Performance Chemicals and Catalyst Solutions. The company also completed the sale of its antioxidant, ibuprofen and propofol businesses to SI Group on September 1, 2014; those results are presented as discontinued operations.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $642.4 million | $591.2 million | $1.847 billion | $1.755 billion |
| Gross profit | $205.4 million | $209.6 million | $608.4 million | $597.2 million |
| Gross margin | 32.0% | 35.5% | 32.9% | 34.0% |
| Operating profit | $106.5 million | $128.8 million | $294.6 million | $349.6 million |
| Operating margin | 16.6% | 21.8% | 16.0% | 19.9% |
| Net income attributable to Albemarle | $72.8 million | $90.5 million | $151.8 million | $257.2 million |
| Diluted EPS | $0.93 | $1.11 | $1.91 | $3.02 |
| Diluted EPS from continuing operations | $1.01 | $1.10 | $2.78 | $2.96 |
| Operating cash flow | $135.4 million | Not separately provided in the filing excerpt | $430.5 million | $317.5 million |
Q3 sales increased 9%, primarily from favorable Catalyst Solutions volumes and pricing. Nine-month sales increased 5%. Catalyst Solutions sales rose 23% in Q3 and 15% year to date, while Performance Chemicals sales were essentially flat in Q3 and declined 1% year to date.
Q3 net income from continuing operations declined 10%, and nine-month continuing-operations income declined 11%. The effective tax rate decreased to 12.9% in Q3 and 17.8% for the first nine months, compared with 22.7% in both comparable 2013 periods, partly reflecting foreign earnings, the domestic manufacturing deduction and a $2.1 million discrete tax benefit.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $653.1 million at September 30, 2014, compared with $477.2 million at December 31, 2013. Approximately $541.9 million was held by foreign subsidiaries.
- Nine-month operating cash flow was $430.5 million. Investing activities provided $21.5 million, including $104.7 million of net divestiture proceeds, partly offset by $76.7 million of capital expenditures and a $7.5 million advance to a joint venture.
- Financing activities used $249.7 million, including $150.0 million for share repurchases and $62.8 million for shareholder dividends.
- Total debt was $1.052 billion, including $368.3 million classified as current. Commercial paper outstanding was $355.9 million, with a weighted-average maturity of 20 days and an average rate of approximately 0.31%.
- The company had no borrowings under its $750 million revolving credit facility, which matures in 2019 and permits an additional $250 million subject to the agreement. Management reported compliance with debt covenants.
- The $325 million of senior notes due February 1, 2015 were classified as long-term based on management’s ability and intent to refinance them.
- Management expects 2014 capital expenditures of approximately $115 million to $120 million and believes cash on hand, operating cash flow and borrowings will fund expected operating, debt-service, capital, pension and dividend requirements.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Catalyst Solutions, but consolidated profitability and margins declined because of higher manufacturing costs, pension and postretirement costs, SG&A, acquisition costs and restructuring charges.
- Performance Chemicals segment income declined 7% in Q3 and 9% for the first nine months, primarily due to pricing pressure in Fire Safety Solutions, higher costs and a customer bankruptcy impact.
- Catalyst Solutions segment income increased 18% in Q3 and 27% for the first nine months, benefiting from stronger volumes, pricing and lower variable input costs.
- Discontinued operations generated an after-tax loss of $6.7 million in Q3 and $68.5 million for the first nine months, compared with income of $0.5 million and $5.0 million, respectively, in 2013. The 2014 results included a $85.5 million pretax loss on the divestiture, or $64.6 million after tax.
- Restructuring and other charges totaled $20.6 million for the first nine months, mainly relating to aluminum alkyl capacity reductions and unrecoverable facility project costs. Acquisition and integration costs totaled $15.1 million, including $9.3 million related to Rockwood.
- Other comprehensive loss was $101.4 million in Q3 and $118.3 million year to date, driven primarily by foreign-currency translation losses and an interest-rate-swap loss.
- The company repurchased approximately 1.97 million shares for $150 million during the first nine months. The repurchase program was suspended pending completion of the Rockwood transaction. The quarterly dividend increased 15% to $0.275 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected Performance Chemicals 2014 sales to be broadly comparable with 2013, while acknowledging soft demand, customer inventory discipline and pricing pressure in brominated flame retardants. Management was cautiously optimistic that brominated flame-retardant volumes had stabilized. Catalyst Solutions was benefiting from favorable volumes and longer-term demand tied to refinery catalysts, plastics, LED applications and tighter fuel standards.
Management projected a 2014 effective tax rate of approximately 20.6% and capital expenditures of approximately $115 million to $120 million. It also expected up to $3 million of annual savings from the aluminum alkyl capacity reduction beginning within two years.
The proposed acquisition of Rockwood was valued at approximately $6.2 billion when announced and was expected to close by the end of the first quarter of 2015, subject to shareholder and regulatory approvals. Albemarle planned to fund the cash portion with approximately $2.2 billion of available cash and up to $1.7 billion of new debt. Financing arrangements included a $1.0 billion term loan and potential bridge facilities. The transaction would materially increase leverage and integration, financing and regulatory risks.
- Merger termination fees could reach $300 million for Albemarle, plus up to $25 million of specified expenses in certain circumstances.
- Environmental liabilities recorded totaled $11.6 million, with management estimating up to approximately $12 million of additional pretax remediation costs reasonably possible.
- The company paid approximately $332,000 under an EPA consent decree related to its former Orangeburg, South Carolina facility.
- The company had approximately $33.0 million of bank guarantees and letters of credit outstanding.
- Foreign-currency, raw-material, energy, interest-rate, regulatory, chemical manufacturing, customer demand and litigation risks could materially affect future results.
- The forward-starting interest-rate swap had an $18.0 million liability at September 30 and was settled on October 15, 2014, resulting in a $33.4 million payment.
Investor Verification Priorities
- Verify completion, financing structure, final purchase price and leverage effects of the Rockwood acquisition.
- Verify refinancing of the $325 million senior notes due February 2015 and the final settlement of the JPMorgan accelerated share repurchase agreement.
- Assess whether Catalyst Solutions’ volume growth and Performance Chemicals’ pricing pressure are sustainable.
- Reconcile reported earnings with discontinued-operation losses, pension remeasurement charges, restructuring costs and Rockwood transaction expenses.
- Monitor cash accessibility because most cash was held outside the United States and may be subject to repatriation considerations.
- Review environmental, merger-related litigation, termination-fee exposure and regulatory approval risks.