Albemarle Corporation — Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals manufacturer serving electronics, petroleum refining, utilities, packaging, construction, automotive, pharmaceuticals, crop protection, food safety and custom chemistry markets. The filing covers the unaudited three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Reportable segments are Polymer Solutions, Catalysts and Fine Chemistry. The company reported strong year-over-year performance, led by pricing, Catalysts and Fine Chemistry, while Polymer Solutions experienced volume softness late in the quarter.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Year-over-year change | Nine months ended September 30, 2011 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $723.0 million | 24% | $2.162 billion | 23% |
| Gross profit | $258.0 million | 31% | $743.0 million | 35% |
| Gross margin | 35.7% | Up from 33.6% | 34.4% | Up from 31.3% |
| Operating profit | $160.3 million | 33% | $451.8 million | 49% |
| Operating margin | 22.2% | Up from 20.6% | 20.9% | Up from 17.3% |
| Net income attributable to Albemarle | $116.1 million | 24% | $336.8 million | 41% |
| Diluted EPS | $1.28 | 25% | $3.66 | 41% |
| Operating cash flow | Not separately provided for the quarter | — | $285.5 million | Up from $275.7 million |
Quarterly net income margin attributable to Albemarle was 16.1%, compared with 16.0% in the prior-year quarter. Nine-month net income margin was 15.6%, compared with 13.6%. The effective tax rate was 25.1% for the quarter and 23.7% for the nine-month period, compared with 24.1% and 24.0%, respectively.
Segment performance
- Polymer Solutions: Third-quarter sales increased 5% to $243.9 million, but segment income declined 7% to $54.6 million as lower volumes, particularly in fire safety products, offset pricing and foreign-exchange benefits. Nine-month sales rose 16% to $792.6 million and segment income increased 37% to $201.2 million.
- Catalysts: Third-quarter sales increased 39% to $299.5 million and segment income increased 48% to $101.9 million. Nine-month sales rose 26% to $827.3 million and segment income increased 26% to $240.0 million, supported by pricing, volumes and joint-venture performance.
- Fine Chemistry: Third-quarter sales increased 30% to $179.5 million and segment income increased 82% to $30.0 million. Nine-month sales increased 30% to $541.7 million and segment income more than doubled to $96.9 million, driven by higher volumes and pricing.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $481.3 million at September 30, 2011, down from $529.7 million at December 31, 2010.
- Operating cash flow of $285.5 million funded $127.1 million of capital expenditures, $10.9 million of equity and corporate investments, $11.0 million of acquisitions and other payments, $105.1 million of debt repayments and $43.1 million of shareholder dividends.
- Capital expenditures were expected to be at least $180 million for 2011.
- Total long-term debt was $891.2 million, including $12.8 million due within one year. Long-term debt excluding the current portion was $878.4 million, compared with $851.9 million at year-end 2010.
- In September 2011, the company replaced its $675.0 million revolving credit facility with a five-year, unsecured facility maturing September 22, 2016. Capacity increased to $750.0 million, with an additional $250.0 million available subject to the agreement. Borrowings outstanding under the facility were $120.0 million, and approximately $630.0 million remained available.
- Management stated that the company was in compliance with its debt covenants and expected cash on hand, operating cash flow and borrowings to fund operating needs, debt service, capital expenditures, pension contributions and dividends.
- The company repurchased 3.0 million shares for $178.1 million during the nine-month period, primarily funded with borrowings during the third quarter. The quarterly dividend was increased to $0.175 per share effective October 13, 2011.
Material changes versus the prior comparable period
- Growth was driven primarily by favorable pricing in all segments, stronger volumes in Catalysts and Fine Chemistry, and favorable foreign-currency effects. For the quarter, pricing contributed approximately 19% to sales growth, foreign currency 4% and volume 1%.
- Raw-material and manufacturing costs increased, but pricing actions generally offset inflation and expanded gross margins.
- SG&A increased 25% in the quarter and 19% year to date; research and development increased 43% and 33%, respectively, reflecting higher personnel and departmental spending.
- Interest and financing expense increased 58% for both the quarter and nine-month period, primarily because of higher average interest rates and borrowings.
- The prior-year nine-month period included $7.0 million of restructuring charges related to workforce reductions at the Bergheim, Germany site; no comparable consolidated restructuring charge was recorded in the 2011 nine-month period, although approximately $1.8 million of workforce-reduction charges were recorded in various locations.
- Shares outstanding declined following the repurchase of 3.0 million shares, partly supporting the increase in diluted EPS.
Guidance, outlook, commentary and risks
Management expected 2011's effective tax rate to be approximately 23.7% and capital expenditures to be at least $180 million. Management described the businesses as fundamentally strong and expected the second half of 2011 to be similar to the first half, while anticipating typical year-end order softness and monitoring economic uncertainty.
- Polymer Solutions faced potential continued volume softness in fire-safety products and seasonal contraction in the fourth quarter, although management cited favorable long-term demand drivers.
- Catalysts benefited from higher pricing and cost pass-through mechanisms, but rare-earth material prices and supply constraints remained important risks.
- Growth initiatives included the Catilin acquisition, the Saudi Arabian SOCC joint venture expected to operate in 2012, the Yeosu, South Korea facility, the new Environmental division and a Brazilian hydroprocessing catalysts project targeted for startup in early 2014.
- Recorded environmental liabilities totaled $13.0 million. Management estimated that additional remediation costs reasonably possible beyond recorded amounts could reach approximately $16.8 million before tax.
- The company was defending an EPA and State of South Carolina lawsuit concerning alleged regulatory violations at its Orangeburg, South Carolina plant. The outcome and financial impact could not be predicted, although management did not expect a material adverse effect.
- Key risk factors include economic conditions, customer demand and order timing, raw-material and energy costs, foreign exchange, regulation, litigation, environmental liabilities, political instability, pension funding, interest rates, access to capital and competition.
Investor verification checklist
- Verify whether Polymer Solutions volume softness persisted beyond the third quarter and whether pricing continued to offset raw-material inflation.
- Assess execution, required capital and expected returns for the Saudi Arabia, South Korea, Brazil, Environmental division and renewable-fuels initiatives.
- Review debt covenant compliance, variable-rate exposure, the $120.0 million credit-facility borrowing and the effect of share repurchases on leverage and liquidity.
- Track cash conversion, inventory and receivables growth, capital expenditures and pension contributions relative to operating cash flow.
- Monitor the Orangeburg environmental litigation and remediation exposures, including the potential $16.8 million of additional environmental costs.
- Confirm the sustainability of the reported margin expansion and the projected 23.7% full-year effective tax rate.