Albemarle Corporation 2019 Form 10-K Summary
Business context and reporting period
Albemarle Corporation is a global specialty chemicals manufacturer serving energy storage, petroleum refining, consumer electronics, construction, automotive, pharmaceuticals, crop protection and other markets. Its reportable segments are Lithium, Bromine Specialties and Catalysts, with fine chemistry services classified as All Other. The filing covers the fiscal year ended December 31, 2019; fourth-quarter information is presented in the unaudited quarterly summary.
The Company operated 29 production and research facilities, served approximately 2,400 customers in about 75 countries and generated approximately 76% of sales outside the United States. On October 31, 2019, Albemarle acquired a 60% interest in the Wodgina lithium project and formed the MARBL Lithium Joint Venture with Mineral Resources Limited.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3.589 billion | $3.375 billion | Up 6% |
| Gross profit | $1.258 billion | $1.217 billion | Up 3% |
| Gross margin | 35.0% | 36.1% | Down 110 basis points |
| Operating profit | $666.1 million | $911.5 million | Down 27% |
| Net income attributable to Albemarle | $533.2 million | $693.6 million | Down 23% |
| Diluted EPS | $5.02 | $6.34 | Down 21% |
| Adjusted EBITDA | $1.037 billion | $1.007 billion | Up 3% |
| Cash flow from operations | $719.4 million | $546.2 million | Up 32% |
| Capital expenditures | $851.8 million | $700.0 million | Up 22% |
- Lithium sales increased 11% to $1.358 billion, while adjusted EBITDA declined 1% to $524.9 million because of higher tolling and other input costs.
- Bromine Specialties sales increased 9% to $1.004 billion and adjusted EBITDA increased 14% to $328.5 million, supported by higher volume and pricing.
- Catalysts sales decreased 4% to $1.062 billion and adjusted EBITDA decreased 5% to $270.6 million, reflecting the Polyolefin Catalysts divestiture, lower volume and unfavorable currency effects.
- All Other sales increased 30% to $165.2 million and adjusted EBITDA increased to $49.6 million from $14.1 million.
- Cash and cash equivalents were $613.1 million at year-end, including $565.6 million held by foreign subsidiaries.
- Total debt was $3.050 billion, including $187.3 million current debt and $2.863 billion noncurrent debt, compared with $1.705 billion total debt at December 31, 2018.
- Available borrowing capacity under the commercial paper program and credit agreements was approximately $1.01 billion. The Company reported compliance with its debt covenants.
- The Company paid $152.2 million in dividends to shareholders and declared dividends of $1.47 per common share for 2019. No shares were repurchased during 2019.
Material changes versus the prior comparable period
- Revenue growth was driven by $213.1 million of higher volume and $76.5 million of favorable pricing, partly offset by $48.1 million of unfavorable currency translation.
- Profitability declined primarily because 2018 included a $210.4 million pretax gain from the Polyolefin Catalysts divestiture. The 2019 results also included Wodgina acquisition-related costs and $64.8 million of stamp duties.
- Selling, general and administrative expense increased 20% to $533.4 million, primarily due to Wodgina-related stamp duties, professional fees, acquisition and integration costs and reorganization-related severance.
- Interest and financing expense increased 10% to $57.7 million because of higher debt balances and a $4.8 million loss on early debt extinguishment.
- Equity income from unconsolidated investments increased 45% to $129.6 million, led by higher income from the Windfield lithium joint venture and certain catalyst joint ventures.
- Operating cash flow improved substantially as working-capital outflows moderated, inventory growth decreased and dividends from unconsolidated investments increased.
- The Wodgina transaction increased lithium assets and debt, but the mine was idled shortly after acquisition because market conditions did not support spodumene production economics. The transaction contributed an approximately $73.0 million loss attributable to Albemarle for November and December 2019 and no sales.
- Adjusted EBITDA improved despite lower GAAP earnings, but the measure includes adjustments for acquisition costs, stamp duty, pension items and other unusual items and is not a GAAP measure.
Guidance, outlook, risks and unusual items
- Management expected Lithium results to decline year over year in 2020 because of pricing pressure and limited new capacity, partly offset by productivity improvements. Long-term lithium demand was expected to benefit from electric vehicles, energy storage, declining battery costs and supportive public policy.
- Bromine Specialties was expected to deliver modest 2020 sales growth, with profitability flat to slightly down because of lower average selling prices as supply and demand normalize.
- Catalysts was expected to generate modest sales growth and flat to modest profitability growth, with FCC growth partly offset by lower hydroprocessing catalyst results.
- Management announced a cost-reduction program expected to generate more than $100 million of sustainable annual savings by the end of 2021.
- Expected 2020 capital expenditures were $1.0 billion to $1.1 billion, primarily for Lithium growth and capacity expansion.
- Management expected a 2020 global effective tax rate of 18.5% to 19.5%, subject to geographic earnings mix and tax-law changes.
- Albemarle began pursuing divestitures of its PCS and fine chemistry services businesses, with each expected to be completed in 2020.
- Chairman and CEO Luke Kissam announced his planned retirement from officer and director roles effective June 2020 for health reasons.
- The Company voluntarily self-reported potential improper payments involving third-party sales representatives in its Refining Solutions business to the DOJ, SEC and Dutch Public Prosecutor. Investigations remained unresolved, and their duration, outcome, penalties and costs could not be predicted.
- Environmental remediation liabilities totaled $42.6 million. Management estimated a reasonable possibility of an additional $10 million to $30 million of environmental costs beyond recorded amounts, generally over time.
- Other significant risks include lithium price and demand volatility, the idling and potential impairment of Wodgina, raw-material and energy cost inflation, foreign exchange exposure, cyclical refinery and electronics markets, regulatory restrictions on chemicals and flame retardants, environmental liabilities, cybersecurity, geopolitical risks and pension funding requirements.
- The filing identifies a $7.0 million out-of-period inventory error correction in third-quarter 2019 cost of goods sold and $29.3 million of fourth-quarter pension and other postretirement actuarial losses, or $21.1 million after tax.
- Management and the auditors concluded that internal control over financial reporting was effective as of December 31, 2019, but the MARBL Lithium Joint Venture, representing approximately 18% of related consolidated assets, was excluded from the internal-control assessment and audit because of its recent acquisition.
Important facts for investors to verify
- Confirm the final purchase-price allocation and impairment sensitivity for Wodgina mineral reserves, which were valued preliminarily at approximately $1.005 billion using significant production, pricing, margin and discount-rate assumptions.
- Track the timing and economics of restarting Wodgina, commissioning the 50,000-metric-ton Kemerton lithium hydroxide capacity and funding the planned $1.0 billion to $1.1 billion of 2020 capital expenditures.
- Reconcile reported GAAP earnings with adjusted EBITDA and isolate the recurring effect of acquisition costs, stamp duty, pension actuarial losses and other unusual items.
- Monitor debt reduction, the $187.3 million of 2020 maturities, floating-rate exposure and compliance with the 3.50-to-1.00 funded-debt-to-EBITDA covenant.
- Follow the DOJ, SEC and Dutch Public Prosecutor investigations concerning potential improper payments and assess any resulting fines, disgorgement, remediation or reputational effects.
- Evaluate lithium pricing, battery and electric-vehicle demand, alternative battery technologies and the effect of excess industry supply on margins.
- Review environmental reserves and the estimated $10 million to $30 million range of potential additional remediation costs, including obligations tied to divested properties.
- Assess the CEO succession process, planned business divestitures and the execution of the announced cost-reduction program.