Albemarle Corporation — Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer operating through Polymer Solutions, Catalysts, and Fine Chemistry. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company reported 89.5 million common shares outstanding as of July 13, 2012.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $684.9 million | $742.1 million | $1.397 billion | $1.439 billion |
| Gross profit | $242.7 million | $251.9 million | $490.6 million | $485.0 million |
| Gross margin | 35.4% | 34.0% | 35.1% | 33.7% |
| Operating profit | $52.4 million | $149.1 million | $200.6 million | $291.5 million |
| Operating margin | 7.7% | 20.1% | 14.4% | 20.3% |
| Net income attributable to Albemarle | $37.7 million | $114.2 million | $145.8 million | $220.7 million |
| Diluted EPS | $0.42 | $1.23 | $1.62 | $2.38 |
| Cash flow from operations | Not separately provided | Not separately provided | $184.9 million | $146.2 million |
- Second-quarter sales declined 8%; six-month sales declined 3%.
- Net income attributable to Albemarle declined 67% in the quarter and 34% year to date.
- Gross margins improved despite lower sales, primarily due to favorable pricing and lower variable input costs.
- Cash and cash equivalents were $461.8 million at June 30, 2012, compared with $469.4 million at December 31, 2011.
- Six-month investing cash outflows were $140.2 million, including $126.6 million of capital expenditures and a $10.0 million loan to the SOCC joint venture.
- Total long-term debt was $754.8 million, including $12.6 million due within one year; long-term debt excluding the current portion was $742.3 million.
- The company had no borrowings outstanding under its $750 million revolving credit facility and reported access to more than $968 million under that facility and other lines of credit, subject to covenants.
- The quarterly dividend was increased to $0.20 per share. The company repurchased 215,000 shares for $13.7 million during the first six months.
Material changes versus the prior comparable period
- Sales declines reflected lower volumes, unfavorable product mix, and foreign exchange effects, partly offset by favorable pricing.
- Polymer Solutions sales decreased 15% in the quarter and 13% year to date, primarily because of lower flame-retardant volumes. Segment income decreased 17% in the quarter and 20% year to date.
- Catalysts sales decreased 14% in the quarter and 1% year to date. Segment income increased 2% in the quarter and 8% year to date, supported by pricing and lower input costs.
- Fine Chemistry sales increased 13% in the quarter and 10% year to date. Segment income increased 17% in the quarter and 23% year to date, driven principally by higher volumes and pricing.
- Operating profit included a $94.7 million restructuring and other charge related to the planned exit from the phosphorous flame-retardants business. The after-tax impact was $73.6 million.
- The restructuring charge included approximately $57 million of asset write-offs, $12 million of foreign-currency translation write-offs, $13 million of severance accruals, $9 million of estimated remediation costs, and $4 million of other exit costs.
- The effective tax rate was 34.1% in the quarter and 27.5% year to date, compared with 21.7% and 22.9%, respectively, in 2011. Excluding the special item, the company reported a second-quarter rate of 26.0% and a year-to-date rate of 25.7%.
- Other comprehensive income was adversely affected by foreign-currency translation losses of $55.9 million in the quarter and $26.9 million year to date.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2012 capital expenditures of approximately $275 million to $300 million and expected future spending to be funded primarily from operating cash flow.
- Management expected a 2012 effective tax rate of approximately 25.7%, excluding special items.
- Noncash U.S. pension and postretirement expense could increase by up to $20 million versus 2011, including approximately $6.5 million of estimated second-half settlement charges related to the former CEO and executive chairman’s retirement.
- Management anticipated $5 million to $15 million of after-tax cash outflows related to the phosphorous flame-retardants exit, with payments expected through 2014. The company expected favorable profit effects beginning in the second half of 2012.
- Management identified potential second-half pressure from weaker global economic conditions, particularly in electronics, lower production utilization, foreign exchange, raw-material costs, and declining rare-earth prices affecting FCC refinery catalysts.
- The company expected its bromine and derivatives expansion at the JBC joint venture in Jordan to come online in the second half of 2012. It delayed expansion of flame-retardant capacity at JBC because of current bromine balances and demand.
- Recorded environmental liabilities totaled $20.1 million at June 30, 2012. Management estimated additional potential environmental remediation costs of up to approximately $15 million before tax.
- The company is defending an EPA and State of South Carolina action concerning alleged environmental and reporting violations at its Orangeburg, South Carolina facility. The outcome and financial impact could not be predicted with certainty, although management did not expect a material adverse effect.
- Off-balance-sheet arrangements, including bank guarantees and letters of credit, totaled approximately $51.4 million and were not expected to materially affect liquidity or capital resources.
- Key risks include global economic conditions, customer demand and ordering patterns, competition, raw-material and energy costs, foreign currency, regulation, litigation, environmental obligations, pension funding, interest rates, financing availability, and political or operational disruptions.
Most important facts for investors to verify
- Whether the phosphorous flame-retardants exit delivers the expected profitability improvement and whether total cash costs remain within the $5 million to $15 million estimate.
- Progress and costs associated with closing the Avonmouth and Nanjing sites, including severance and remediation obligations.
- Second-half demand trends in electronics, flame retardants, refinery catalysts, and drilling-related markets.
- Impact of rare-earth price declines, foreign exchange movements, raw-material costs, and production utilization on segment margins.
- Actual capital expenditures relative to the $275 million to $300 million 2012 expectation and the resulting effect on cash balances and debt.
- Compliance with revolving-credit and senior-note covenants and continued availability of more than $968 million in committed or other credit capacity.
- Developments in the Orangeburg environmental litigation and whether remediation liabilities exceed recorded amounts.
- Actual pension, postretirement, and executive retirement settlement costs compared with management’s estimates.