Business Context and Reporting Period
Albemarle Corporation filed this Form 10-K for the fiscal year ended December 31, 2012, with quarterly information for fourth quarter 2012. The company develops and manufactures specialty chemicals through three segments: Polymer Solutions, Catalysts, and Fine Chemistry. It operated 51 facilities, served approximately 2,800 customers in about 100 countries, and had 4,304 employees at year-end.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $2,745.4 million | $2,869.0 million | Down 4% |
| Gross profit | $910.0 million | $954.9 million | Down 5% |
| Gross margin | 33.1% | 33.3% | Down 0.2 points |
| Operating profit | $406.2 million | $517.8 million | Down 22% |
| Operating margin | 14.8% | 18.0% | Down 3.2 points |
| Net income attributable to Albemarle | $311.5 million | $392.1 million | Down 21% |
| Diluted EPS | $3.47 | $4.28 | Down 19% |
| Cash flow from operations | $488.8 million | $487.4 million | Essentially flat |
- Segment sales were $892.2 million for Polymer Solutions, $1,067.9 million for Catalysts, and $785.2 million for Fine Chemistry.
- Segment income declined 16% for Polymer Solutions and 10% for Catalysts, while Fine Chemistry segment income increased 15%.
- Year-end cash and cash equivalents were $477.7 million. Net current assets were approximately $1.0 billion.
- Total long-term debt was $699.3 million, including $324.9 million of 5.10% senior notes due 2015 and $347.5 million of 4.50% senior notes due 2020. No borrowings were outstanding under the $750 million revolving credit facility.
- The company had access to more than $986 million under its revolving facility and other credit lines, subject to covenants. Management stated that liquidity was sufficient for operations, debt service, capital spending, dividends, and planned share repurchases.
- Capital expenditures were $280.9 million, compared with $190.6 million in 2011. Management expected 2013 capital expenditures of approximately $150 million.
- Shareholder returns included $69.1 million of dividends and $63.6 million of share repurchases in 2012. The quarterly dividend was increased from $0.20 to $0.24 per share in February 2013.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of 3% unfavorable pricing, principally lower metals surcharges in refinery catalysts, and 1% unfavorable foreign currency effects. Overall volume was flat.
- Polymer Solutions was affected by weaker flame-retardant volumes, lower mineral flame-retardant pricing, currency effects, and the exit from phosphorus flame retardants. The segment recorded $892.2 million of sales, down 11%.
- Catalysts sales declined 4% because of lower metals surcharges and currency effects, partly offset by higher volumes and improved Performance Catalyst Solutions pricing.
- Fine Chemistry sales rose 5% and segment income rose 15%, driven mainly by volume growth in custom services, intermediates, and performance chemicals.
- SG&A declined 13% to $313.2 million, primarily because of lower incentive compensation, personnel costs, and other spending.
- Research and development expense increased 2% to $78.9 million.
- Equity income from unconsolidated investments declined 13% to $38.1 million, while noncontrolling interest expense declined to $18.6 million from $28.1 million.
- Albemarle adopted mark-to-market accounting for pension and other postretirement actuarial gains and losses, retrospectively adjusting prior periods. The change reduced 2012 net income attributable to Albemarle by approximately $20.2 million and reduced diluted EPS by $0.22.
Guidance, Outlook, Risks, and Unusual Items
- Management expected economic uncertainty and weak end-market conditions to continue into 2013, particularly in electronics and European construction. Lower production utilization could pressure sales and profitability.
- Management expected a 2013 global effective tax rate of approximately 25.5%, versus 22.0% in 2012, subject to geographic earnings mix and tax-law changes.
- The company completed or substantially advanced growth projects in electronic materials, polyolefin catalysts, South Korea, Saudi Arabia, Jordan, and Fine Chemistry services. Several facilities or joint ventures were expected to become operational in 2013.
- Albemarle recorded $111.7 million of restructuring and other charges in 2012, including a $100.8 million charge related to exiting the phosphorus flame-retardants business. The after-tax impact of that exit was $76.1 million, with expected additional after-tax cash outflows of approximately $5 million to $15 million through 2014.
- The exit included asset write-offs, foreign currency translation write-offs, severance, site remediation, and other costs. The company sold its Nanjing, China site and ceased production of decaBDE at year-end 2012.
- HBCD represented approximately 1.9% of 2012 sales and faced potential European restrictions or bans. DecaBDE represented approximately 0.7% of sales and production ceased at the end of 2012.
- Key risks include global economic and cyclical demand, raw-material and energy price volatility, inability to pass through cost increases, competition, foreign currency movements, environmental and product regulation, chemical manufacturing hazards, pension funding, joint-venture performance, and debt refinancing.
- Environmental liabilities recorded at year-end were approximately $20.3 million; management estimated reasonably possible additional remediation costs of up to approximately $16 million before tax.
- The company was defending EPA and South Carolina litigation relating to its Orangeburg, South Carolina facility. The potential financial impact could not be predicted, although management did not expect a material adverse effect.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective as of December 31, 2012.
Important Facts for Investors to Verify
- Reconcile reported 2012 earnings with the $111.7 million restructuring charge and the retrospective pension accounting change.
- Assess whether Catalysts profitability can recover from lower metals surcharges, particularly rare-earth pricing effects, and whether Fine Chemistry growth offsets weakness elsewhere.
- Review the timing and cash cost of the phosphorus flame-retardants exit, including severance and Avonmouth remediation obligations.
- Evaluate 2015 debt maturity requirements, available revolving capacity, covenant compliance, and the company’s ability to fund capital spending and planned share repurchases.
- Monitor regulatory developments affecting HBCD, decaBDE, methyl bromide, and other brominated flame retardants.
- Review pension funding status, the change in expected U.S. pension asset returns, and the sensitivity of obligations to discount rates and investment performance.
- Confirm the outcome and potential costs of the Orangeburg environmental litigation and other environmental contingencies.