Albemarle Corporation 2012 Q1 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals company serving petroleum refining, plastics and packaging, construction, automotive, pharmaceuticals, crop protection, food safety, electronics and other markets. The filing reports unaudited results for the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $711.7 million | $696.5 million | 2% |
| Gross profit | $247.9 million | $233.0 million | 6% |
| Gross margin | 34.8% | 33.5% | Up 130 bps |
| Operating profit | $148.1 million | $142.4 million | 4% |
| Operating margin | 20.8% | 20.4% | Up 40 bps |
| Net income attributable to Albemarle | $108.0 million | $106.6 million | 1% |
| Diluted EPS | $1.20 | $1.15 | 4% |
| Cash flow from operations | $123.5 million | $46.6 million | Up $77.0 million |
| Capital expenditures | $54.8 million | $31.9 million | Up $22.9 million |
Pricing was favorable by 8%, while volume reduced sales by 6%. Segment sales were $293.5 million for Catalysts, $228.1 million for Polymer Solutions and $190.1 million for Fine Chemistry. Segment operating profit was $75.4 million, $52.7 million and $41.9 million, respectively.
Cash and cash equivalents were $519.4 million at March 31, 2012, compared with $469.4 million at December 31, 2011. Total debt was $756.7 million, including $14.5 million due within one year; long-term debt excluding the current portion was $742.2 million. The company reported more than $986 million of borrowing capacity under its revolving credit facility and other lines, subject to covenants.
Net current assets increased to approximately $1.04 billion from $954.4 million at year-end 2011. The company declared a quarterly dividend of $0.20 per share, increased 14% from $0.165 per share in the prior-year quarter.
Material changes versus the prior comparable period
- Catalysts sales increased 12% and segment income increased 13%, primarily due to pricing gains and stable volumes.
- Fine Chemistry sales increased 7% and segment income increased 31%, reflecting improved pricing and volumes, particularly in services and intermediates.
- Polymer Solutions sales declined 12% and segment income declined 23%, mainly because of a 17% volume reduction associated with weaker customer ordering patterns.
- Gross margin improved despite higher raw-material costs, manufacturing spending and lower overall volumes.
- SG&A increased 10% and R&D increased 8%, reflecting higher personnel, sales commission and development costs.
- Equity income from unconsolidated investments declined 33%, primarily because of lower volumes at the Nippon Ketjen joint venture.
- Operating cash flow improved substantially, partly because pension contributions were $1.4 million versus $50.8 million in the prior-year quarter.
- Average basic shares outstanding declined to 89.0 million from 91.6 million, supporting the increase in EPS.
Guidance, outlook, risks and unusual items
Management expects the full-year 2012 effective tax rate to be approximately 25.5% and capital expenditures to approach $300 million. It expects 2012 pension and postretirement expense to increase by up to $20 million from 2011 levels. Management believes cash on hand, operating cash flow and borrowing capacity will be sufficient for operating needs, debt service, capital expenditures, pension contributions and dividends.
Management described the Catalysts and Fine Chemistry outlook as favorable and expects gradual demand improvement in Polymer Solutions during the second half of 2012, while noting continued uncertainty regarding global economic conditions, customer order patterns, raw-material and energy costs, pension costs and foreign exchange.
Significant planned or developing initiatives include expansion of bromine capacity in Jordan, a polyolefin catalysts joint venture in Saudi Arabia expected to operate in late 2012, and additional electronic materials and catalysts capacity. The filing states that no material changes occurred in previously disclosed risk factors.
- Q1 2012 included an $8.1 million pretax gain from settlement of commercial litigation, net of estimated legal-fee reimbursement.
- Q1 2012 included an $8.0 million pretax charitable contribution to the Albemarle Foundation.
- Recorded environmental liabilities were $12.4 million. Management estimated additional potential environmental remediation costs of up to approximately $16.7 million before tax.
- The company is defending an EPA and State of South Carolina action involving alleged environmental and reporting violations at its Orangeburg, South Carolina facility. The outcome and financial impact were not predictable.
- Off-balance-sheet bank guarantees and letters of credit totaled approximately $55.4 million.
- Variable-rate debt outstanding was $57.3 million, and foreign-currency forward contracts had notional values of $194.6 million.
Important facts for investors to verify
- Whether Polymer Solutions volumes recover as management anticipated and whether pricing continues to offset input-cost inflation.
- The sustainability of Catalysts and Fine Chemistry growth, including contributions from joint ventures and new capacity.
- The effect of higher pension, personnel, raw-material and energy costs on margins and cash flow.
- Progress and spending against the approximately $300 million 2012 capital-expenditure plan.
- Compliance with debt covenants and continued availability of the reported borrowing capacity.
- Developments in the EPA litigation and environmental remediation liabilities, including potential costs beyond recorded reserves.
- Whether the reported cash balance is readily available for U.S. corporate uses, given that $452.6 million was held by foreign subsidiaries and much of that balance was designated as permanently reinvested.