Albemarle Corporation — Q2 2019 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer serving energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection and custom chemistry markets. Reportable segments are Lithium, Bromine Specialties and Catalysts, with fine chemistry services included in All Other. The unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $885.1 million | $853.9 million | $1.717 billion | $1.676 billion |
| Gross profit / margin | $325.9 million / 36.8% | $311.4 million / 36.5% | $609.4 million / 35.5% | $616.3 million / 36.8% |
| Operating profit / margin | $185.7 million / 21.0% | $390.4 million / 45.7% | $340.9 million / 19.9% | $573.0 million / 34.2% |
| Net income attributable to Albemarle | $154.2 million | $302.5 million | $287.8 million | $434.2 million |
| Diluted EPS | $1.45 | $2.73 | $2.71 | $3.90 |
| Adjusted EBITDA | $261.9 million | $258.6 million | $487.8 million | $507.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $199.3 million | $223.9 million |
| Capital expenditures | Not separately provided | Not separately provided | $415.6 million | $280.9 million |
Q2 sales increased 4%, while six-month sales increased 2%. Q2 net income attributable to Albemarle declined 49% and six-month net income declined 34%, primarily because 2018 included a $218.7 million pretax, approximately $176.7 million after-tax, gain from the Polyolefin Catalysts Divestiture. Excluding that gain, management stated that underlying earnings improved in 2019, although six-month adjusted EBITDA declined 4%.
Segment performance
- Lithium: Q2 sales increased 2% to $324.8 million and adjusted EBITDA was essentially flat at $141.8 million. Six-month sales were approximately flat at $616.6 million, while adjusted EBITDA declined 6% to $257.4 million due mainly to higher input and tolling costs and lower volume.
- Bromine Specialties: Q2 sales increased 16% to $255.4 million and adjusted EBITDA increased 17% to $81.3 million. Six-month sales increased 13% to $504.5 million and adjusted EBITDA increased 15% to $159.9 million, driven by volume and pricing.
- Catalysts: Q2 sales declined 7% to $266.3 million and adjusted EBITDA declined 11% to $66.9 million, primarily due to lower FCC catalyst volume, lighter global crude and higher raw material costs. Six-month sales declined 5% to $517.9 million and adjusted EBITDA declined 11% to $126.9 million, including the impact of the 2018 divestiture.
- All Other: Q2 sales increased 25% to $38.6 million; adjusted EBITDA increased to $11.2 million from a loss of $0.1 million. Six-month sales increased 15% to $78.0 million and adjusted EBITDA increased to $18.5 million.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $398.2 million at June 30, 2019, down from $555.3 million at December 31, 2018. Approximately $385.2 million was held by foreign subsidiaries.
- Operating cash flow was $199.3 million for the first six months, down from $223.9 million. Working capital used $223.2 million, primarily because of inventory accumulation in Lithium and Catalysts, receivable timing and higher cash taxes.
- Capital expenditures were $415.6 million, and management expected full-year 2019 capital expenditures of approximately $900 million to $1.0 billion, mainly for Lithium growth and capacity expansion and productivity and continuity projects.
- Total debt was $1.889 billion, including $490.0 million of commercial paper classified as current debt. Commercial paper had a weighted-average interest rate of approximately 2.67% and maturity of 32 days.
- The company had no borrowings under its $1.0 billion revolving credit facility, had approximately $510.0 million of availability under the commercial paper program and revolving facility, and reported approximately $583.0 million of availability under other existing credit lines. Management stated that debt covenants were satisfied.
- Management expected cash on hand, operating cash flow, divestiture proceeds and borrowings to fund operating expenses, debt service, capital expenditures, acquisitions, pension contributions and dividends for the foreseeable future.
Material changes, outlook and unusual items
- The company adopted the new lease standard on January 1, 2019, recording approximately $139.1 million of additional net lease assets and liabilities. The adoption did not affect net income or cash flow.
- The board increased the quarterly dividend by 10% to $0.3675 per share. A July 2019 dividend was declared at the same rate.
- Albemarle announced an amended agreement to acquire a 60% interest in Mineral Resources Limited’s Wodgina hard-rock lithium mine and related operations. The transaction was expected to close in the second half of 2019 for total consideration of approximately $1.3 billion, consisting of $820 million in cash and a transfer of a 40% interest in certain Kemerton lithium hydroxide conversion assets valued at $480 million. Management expected the cash portion to be funded primarily with new debt.
- Management expected strong Lithium year-over-year growth during the remainder of 2019, supported by battery-grade demand and increased conversion capacity. It expected continued 2019 sales and profitability growth in Bromine Specialties, while Catalysts faced volume pressure from lighter crude and higher raw material costs.
- Management projected a 2019 global effective tax rate of approximately 20%, subject to geographic earnings mix and tax-law changes.
- Q2 2019 included $4.8 million of severance-related costs and $5.0 million of acquisition and integration costs. The six-month period included $5.3 million of severance costs, $10.3 million of acquisition and integration costs and an $11.1 million gain on the sale of land.
- The company continued to cooperate with the DOJ, SEC and Dutch Public Prosecutor regarding a voluntary self-report concerning potential improper payments by third-party sales representatives in the Refining Solutions business. The duration, outcome and costs were not predictable.
- Recorded environmental liabilities were $46.8 million at June 30, 2019. Management estimated a reasonable possibility of an additional $10 million to $30 million of environmental remediation costs before tax beyond recorded amounts, potentially over multiple years.
- Key disclosed risks included economic and customer demand conditions, pricing and raw material costs, foreign currency movements, regulatory and environmental matters, chemical manufacturing hazards, litigation, cyber and operational risks, access to financing, execution of acquisitions and divestitures, and the significant planned capital spending and Wodgina transaction.
Most important facts for investors to verify
- Whether Lithium volume growth and new conversion capacity offset higher input costs and the substantial planned capital investment.
- The timing, funding, closing conditions and eventual economics of the Wodgina transaction and related Kemerton asset transfer.
- Whether Catalysts volume weakness from crude quality and refinery conditions persists.
- Operating cash conversion, inventory normalization and leverage after the planned $900 million to $1.0 billion of 2019 capital expenditures.
- The outcome and potential financial impact of the DOJ, SEC and Dutch Public Prosecutor investigations.
- Changes in environmental remediation estimates, including the disclosed potential $10 million to $30 million additional exposure.
- Adjusted EBITDA reconciliations and the effect of unusual items when assessing underlying performance; adjusted EBITDA is a non-GAAP measure.