Business Context and Reporting Period
Albemarle Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company develops, manufactures and markets specialty chemicals through its Polymer Solutions, Catalysts and Fine Chemistry segments.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $742.1 million, up 25% | $1.439 billion, up 23% |
| Gross profit | $251.9 million, up 34% | $485.0 million, up 38% |
| Gross margin | 34.0%, versus 31.8% | 33.7%, versus 30.1% |
| Operating profit | $149.1 million, up 40% | $291.5 million, up 59% |
| Operating margin | 20.1%, versus 18.0% | 20.3%, versus 15.6% |
| Net income attributable to Albemarle | $114.2 million, up 40% | $220.7 million, up 52% |
| Diluted EPS | $1.23, up 38% | $2.38, up 52% |
| Operating cash flow | Not separately provided | $146.2 million, versus $134.1 million |
- Revenue growth reflected favorable pricing, volumes and foreign currency. For the quarter, pricing contributed 17%, volume 5% and foreign currency 3%; for the six months, pricing contributed 14%, volume 7% and foreign currency 2%.
- Six-month segment sales were $548.7 million for Polymer Solutions, $527.8 million for Catalysts and $362.2 million for Fine Chemistry. Segment income increased 65%, 14% and 128%, respectively.
- Cash and cash equivalents were $490.7 million at June 30, 2011, compared with $529.7 million at December 31, 2010. Current assets were $1.456 billion and current liabilities were $394.4 million.
- Total long-term debt, including the current portion, was $771.8 million, down from $860.9 million at year-end 2010. The company reported $758.9 million of noncurrent debt and no borrowings under its $675.0 million revolving credit facility.
- Capital expenditures were $67.6 million in the first six months. Management expects approximately $150 million of capital expenditures for full-year 2011.
- The company paid $28.0 million in dividends and repaid $105.2 million of long-term debt during the first six months. The quarterly dividend was increased to $0.165 per share.
Material Changes Versus the Prior Comparable Period
- Results improved substantially due to price increases implemented to offset raw-material inflation, stronger demand and improved production rates.
- Gross and operating margins expanded despite higher raw-material, manufacturing, personnel, selling and research-and-development costs.
- Interest expense increased to $18.9 million for the six months from $11.9 million, primarily because of higher average borrowing rates.
- The effective tax rate declined to 22.9% for the first six months from 24.0% in 2010. Management expected a 22.9% full-year 2011 effective tax rate.
- The 2010 period included $7.0 million of restructuring charges related to workforce reductions at the Bergheim, Germany site; no comparable income-statement charge was recorded in the first six months of 2011, although related liabilities remained.
- Foreign-currency translation increased accumulated other comprehensive loss from $164.2 million at year-end 2010 to $62.6 million at June 30, 2011, primarily reflecting favorable translation effects.
- Albemarle acquired Catilin, Inc. in May 2011 to expand its biodiesel-catalysis and biofuels presence. The filing does not provide the acquisition price or a separate earnings contribution.
Guidance, Outlook, Risks and Unusual Items
Management expected typical seasonal contraction and potential fourth-quarter volume softness but projected that the fundamentals supporting first-half performance would remain in place and produce solid earnings growth for the remainder of 2011. The company cited tight supply, strong global markets and pricing actions as positive factors.
- Key risks include raw-material and energy cost inflation, foreign-exchange movements, customer demand and order timing, competition, regulatory changes, political instability, litigation, natural disasters, pension funding requirements and restricted access to debt or capital markets.
- Rare-earth price increases caused by Chinese export quotas affected the FCC refinery-catalysts business. Management cited supply-security measures and cost pass-through mechanisms as mitigating factors.
- Cash requirements include capital spending, debt service, dividends, working capital and pension funding. The company expected approximately $55 million of 2011 pension contributions and had contributed $53.6 million through June 30.
- Recorded environmental liabilities totaled $13.7 million. Management estimated that additional environmental remediation costs could be up to approximately $17.3 million before tax, although it did not expect a material annual consolidated impact.
- In the second quarter, the EPA and South Carolina filed litigation concerning alleged environmental violations at the Orangeburg, South Carolina facility. The outcome and financial impact were not predictable; management did not expect a material adverse effect.
- Off-balance-sheet bank guarantees and letters of credit totaled approximately $31.2 million at June 30, 2011.
- Foreign-currency forward contracts had aggregate notional values of approximately $242.5 million and were used for hedging rather than trading.
Important Facts for Investors to Verify
- Whether pricing actions continue to offset raw-material and energy inflation, particularly in Polymer Solutions and Catalysts.
- The sustainability of unusually strong Fine Chemistry growth and the expected contribution from Catilin.
- Progress and funding requirements for the Saudi Arabia joint venture, South Korean site, Brazilian HPC project and other capacity expansions.
- Actual full-year capital expenditures, pension contributions, cash generation and debt repayment compared with management expectations.
- Developments and potential costs associated with the Orangeburg EPA litigation and environmental remediation obligations.
- Whether fourth-quarter seasonality, foreign-exchange changes or global economic conditions reduce volumes or margins.
- The filing’s unaudited results and management’s statement that interim performance is not necessarily indicative of full-year results.