Albemarle Corporation — 2013 Form 10-K Summary
Business context and reporting period
Albemarle is a global specialty-chemicals manufacturer serving petroleum refining, electronics, plastics and packaging, construction, automotive, lubricants, pharmaceuticals, agriculture, food safety and custom-chemistry markets. It operated through Polymer Solutions, Catalysts and Fine Chemistry during 2013, with approximately 2,700 customers in 100 countries and 4,231 employees. The filing covers the fiscal year ended December 31, 2013; fourth-quarter information is included in the unaudited quarterly data.
Effective January 1, 2014, the Company reorganized into Performance Chemicals and Catalyst Solutions segments. The 2013 filing therefore reports the historical three-segment structure.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2.616 billion | $2.745 billion | Down 5% |
| Gross profit | $861.4 million | $910.0 million | Down 5% |
| Gross margin | 32.9% | 33.1% | Down 20 bps |
| Operating profit | $582.9 million | $406.2 million | Up 44% |
| Operating margin | 22.3% | 14.8% | Up 750 bps |
| Net income attributable to Albemarle | $413.2 million | $311.5 million | Up 33% |
| Diluted EPS | $4.90 | $3.47 | Up 41% |
| Cash flow from operations | $432.9 million | $488.8 million | Down 11% |
- 2013 net sales declined primarily from unfavorable pricing, including lower refinery-catalyst metals surcharges, lower bromine pricing and lower flame-retardant pricing. Volume increased 2%.
- SG&A fell 48% to $162.9 million, helped substantially by pension and other postretirement benefit gains. Research and development increased 4% to $82.2 million.
- The effective tax rate increased to 25.0% from 22.0%. Equity income from unconsolidated investments declined to $31.7 million from $38.1 million.
- Fourth-quarter 2013 net sales were $692.0 million, gross profit was $253.5 million and net income attributable to Albemarle was $155.9 million, including $33.4 million of restructuring charges.
- At December 31, 2013, cash and cash equivalents were $477.2 million. Current assets were $1.483 billion versus current liabilities of $436.4 million.
- Total long-term debt was $1.079 billion, including $363.0 million of commercial paper, $325.0 million of 5.10% senior notes due 2015 and $350.0 million of 4.50% senior notes due 2020. The Company reported compliance with debt covenants.
- Capital expenditures were $155.3 million, dividends paid were $78.1 million and share repurchases were $582.3 million for 2013. The Company repurchased approximately 9.2 million shares.
Segment performance and material changes
| Segment | 2013 sales | Change | 2013 segment income | Change |
|---|---|---|---|---|
| Polymer Solutions | $864.4 million | Down 3% | $157.9 million | Down 22% |
| Catalysts | $1.002 billion | Down 6% | $245.6 million | Down 16% |
| Fine Chemistry | $750.4 million | Down 4% | $131.7 million | Down 21% |
- Polymer Solutions experienced pricing pressure in flame retardants and additives, partly offset by mid-single-digit volume growth in mineral and brominated flame retardants. The 2012 exit from phosphorus flame retardants reduced 2013 sales by approximately $33.6 million.
- Catalysts benefited from strong refinery-catalyst volumes but was hurt by lower metals surcharges, unfavorable mix, foreign exchange and lower equity income from joint ventures.
- Fine Chemistry reported record clear-completion-fluid volumes and revenue, but results were pressured by bromine pricing, higher fixed costs from the Jordan expansion, project timing and lower pharmaceutical and agricultural volumes.
- Corporate and other shifted from a $123.8 million expense in 2012 to an $86.1 million benefit in 2013, principally because of pension and OPEB actuarial gains. The 2013 after-tax pension and OPEB actuarial gain was $88.3 million, compared with a $48.2 million loss in 2012.
Outlook, risks, contingencies and unusual items
- Management remained cautiously optimistic that brominated flame-retardant pricing had stabilized, while noting soft demand, customer destocking and cautious inventories. Long-term demand is expected to benefit from higher living standards, fire-safety requirements, new polyolefin capacity and demand for catalysts and electronic materials.
- Management expected 2014 capital expenditures of approximately $130 million and an effective tax rate of approximately 25.0%. It anticipated sufficient cash, operating cash flow and borrowing capacity to fund operations, debt service, capital expenditures, dividends and share repurchases.
- The 2014 realignment generated $33.4 million of workforce-reduction and related charges and is expected to eliminate approximately 230 positions. Payments were expected through 2014, with resources intended to be redeployed toward research, sales and business development.
- Albemarle acquired Cambridge Chemical Company for approximately $3.6 million, expanded catalyst and bromine capacity, and continued development of GreenCrest as a potential replacement for HBCD.
- HBCD represented approximately 1.3% of 2013 sales and faced potential European and international restrictions beginning in 2014–2015. Methyl bromide sales were approximately 0.4% of 2013 sales and remain subject to regulatory limits.
- Environmental liabilities totaled $16.6 million at year-end. Management estimated reasonably possible additional environmental remediation costs of up to approximately $17 million before tax, while stating that known environmental liabilities were not expected to be material annually.
- The Company was defending an EPA and South Carolina lawsuit concerning alleged emissions-compliance violations at its Orangeburg, South Carolina facility. The outcome could involve penalties, capital expenditures or other costs, but management did not expect a material adverse effect.
- The Company entered a new $750.0 million revolving credit facility in February 2014, replacing the prior facility, and entered an interest-rate swap in preparation for refinancing the $325.0 million senior notes due in 2015.
- Key risks include raw-material and energy inflation, inability to pass through costs, cyclical demand, refinery-catalyst replacement timing, foreign exchange, international operations, environmental and product regulation, HBCD substitution, operational hazards, cyber-security, pension funding and debt refinancing.
Most important facts for investors to verify
- Separate recurring operating performance from the $143.1 million of 2013 pension and OPEB benefits, including actuarial gains, that materially improved reported profit.
- Assess refinancing execution for the $325.0 million of senior notes due in 2015 and the Company’s reliance on commercial paper and the new revolving credit facility.
- Monitor bromine and flame-retardant pricing, HBCD replacement products, regulatory developments and the effect of customer destocking.
- Review whether new Jordan, South Korea, Saudi Arabia and other capacity investments achieve expected utilization and returns.
- Evaluate cash deployment, including $582.3 million of 2013 share repurchases, increased dividends and planned 2014 repurchases, against operating cash flow and debt levels.
- Review environmental reserves, the Orangeburg litigation, guarantees and other contractual obligations for potential costs beyond recorded amounts.
- Confirm the effect of the 2014 segment realignment and workforce reduction on future reporting comparability and operating expenses.