Albemarle Corporation 2013 Q3 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer serving refining, catalysts, flame retardants, plastics, electronics, pharmaceuticals, crop protection and custom chemistry markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $648.6 million | $661.2 million | $1.924 billion | $2.058 billion |
| Gross profit | $211.6 million | $217.8 million | $607.9 million | $718.0 million |
| Gross margin | 32.6% | 32.9% | 31.6% | 34.9% |
| Operating profit | $129.7 million | $144.5 million | $356.7 million | $374.4 million |
| Operating margin | 20.0% | 21.9% | 18.5% | 18.2% |
| Net income attributable to Albemarle | $90.5 million | $109.5 million | $257.2 million | $273.8 million |
| Diluted EPS | $1.11 | $1.22 | $3.02 | $3.04 |
- Operating cash flow was $317.5 million for the first nine months, versus $306.5 million in the prior-year period.
- Capital expenditures were $135.0 million; management expected approximately $175 million for full-year 2013.
- Cash and cash equivalents were $401.4 million at September 30, 2013, down from $477.7 million at December 31, 2012.
- Total debt was $1.080 billion, including $363.0 million of commercial paper; the company reported no borrowings under its $750 million revolving credit facility.
- Available borrowing capacity was approximately $640 million across the commercial paper program, revolving facility and other credit lines, subject to covenants.
- Cash uses included $582.3 million of share repurchases, $58.6 million of shareholder dividends and $9.9 million of pension and postretirement contributions.
- The quarterly dividend was increased 20% to $0.24 per share. The company repurchased approximately 7.8 million shares during the first nine months.
Material changes versus the prior comparable period
- Third-quarter sales declined 2%, while net income attributable to Albemarle declined 17% and diluted EPS declined 9%.
- First-nine-month sales declined 6% and attributable net income declined 6%; diluted EPS declined 1%.
- Lower pricing, particularly metals surcharges, bromine and flame-retardant pricing, weaker foreign currencies and higher manufacturing costs pressured results.
- Q3 SG&A increased 17% because of higher personnel-related and outside-services costs.
- Year-to-date 2012 included $94.7 million of restructuring and other charges related to exiting the phosphorus flame-retardants business. No comparable charge was recorded in 2013, partially offsetting the underlying operating deterioration.
- Segment sales and income were weaker across the first nine months: Polymer Solutions sales declined 4% and segment income declined 22%; Catalysts sales declined 10% and income declined 22%; Fine Chemistry sales declined 4% and income declined 21%.
- The company retrospectively changed its pension and postretirement accounting to mark-to-market accounting and corrected a prior-period pension/OPEB actuarial gain correction of $10.3 million, which management deemed immaterial to previously issued financial statements.
Guidance, outlook, risks and unusual items
- Management described continued global economic headwinds but noted a slight improvement in overall business results during the second half of 2013.
- The company expected a 2013 effective tax rate of approximately 22.8%, subject to geographic earnings mix and legislative changes.
- A voluntary separation program initiated in October 2013 was expected to produce a fourth-quarter restructuring charge of no more than $20 million, although the final amount was not yet determinable.
- Based on September 30 market conditions, management estimated a potentially material fourth-quarter pension/OPEB mark-to-market actuarial gain of approximately $100 million; the actual adjustment could differ.
- Effective January 1, 2014, the three operating segments were to be reorganized into Performance Chemicals and Catalyst Solutions.
- On October 1, 2013, the company acquired Cambridge Chemical Company, Ltd. for approximately $3.6 million.
- Key risks include weak end-market demand, customer order volatility, pricing and raw-material pressure, underutilized production assets, foreign-exchange movements, regulatory and environmental obligations, litigation, pension-market volatility, financing-market conditions and execution of restructuring and reorganization initiatives.
- Recorded environmental liabilities totaled $17.0 million, with management estimating additional potential remediation costs of up to approximately $17 million before tax. The company also disclosed ongoing EPA litigation involving its Orangeburg, South Carolina facility, but could not predict the outcome.
- The company stated that it was in compliance with debt covenants and expected cash on hand, operating cash flow and borrowing capacity to fund operations, debt service, capital spending, dividends and planned investments.
Most important facts for investors to verify
- Whether pricing and metals-surcharge pressure in Catalysts, bromine and flame retardants improves or continues to compress margins.
- The final fourth-quarter pension/OPEB mark-to-market adjustment and its effect on earnings, equity and cash funding requirements.
- The final cost and savings from the voluntary separation program and the two-segment reorganization.
- Commercial paper refinancing capacity, short maturities and total leverage relative to covenant-adjusted EBITDA.
- The final share count and settlement economics of the $450 million accelerated share repurchase program.
- Progress and profitability of the Yeosu catalyst facility, Cambridge Chemical acquisition and other growth initiatives.
- Environmental remediation estimates and the potential exposure from the Orangeburg EPA litigation.