Business Context and Reporting Period
Albemarle Corporation is a global specialty chemicals producer serving petroleum refining, lithium and energy storage, bromine, construction, automotive, pharmaceuticals, crop protection and other markets. Its reportable segments are Lithium and Advanced Materials, Bromine Specialties and Refining Solutions; All Other primarily comprises fine chemistry services.
This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The 2016 comparison reflects the Chemetall Surface Treatment business as discontinued operations following its December 2016 sale.
Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Net sales | $737.3 million | $669.3 million | 10% |
| Gross profit / margin | $272.1 million / 36.9% | $248.1 million / 37.1% | Profit 10%; margin down 20 bps |
| Operating profit / margin | $139.1 million / 18.9% | $123.5 million / 18.5% | Profit 13%; margin up 40 bps |
| Net income from continuing operations | $113.7 million | $95.6 million | 19% |
| Net income attributable to Albemarle | $103.3 million | $(314.8) million | Prior period affected by discontinued-operations tax charge |
| Diluted EPS from continuing operations | $0.92 | $0.74 | 24% |
| Adjusted EBITDA | $218.9 million | $190.5 million | 15% |
| Cash flow from operations | $(137.0) million | $80.1 million | Declined; included approximately $255 million of taxes related to the Chemetall sale |
For the six months ended June 30, 2017, net sales were $1.459 billion, up 10%; gross profit was $527.2 million, with a 36.1% margin versus 37.0%; operating profit was $261.8 million, with a 17.9% margin versus 27.6%; net income from continuing operations was $176.3 million versus $313.8 million; diluted continuing-operations EPS was $1.37 versus $2.61; and adjusted EBITDA was $430.3 million versus $382.5 million.
Six-month operating cash flow was $(54.5) million versus $252.8 million in 2016. Cash and cash equivalents were $1.007 billion at June 30, 2017, down from $2.270 billion at December 31, 2016. Inventory increased to $565.9 million from $450.3 million, primarily due to the Jiangli acquisition and lithium inventory buildup.
Segment Performance and Material Changes
- Lithium and Advanced Materials: Q2 sales rose 36% to $317.9 million and adjusted EBITDA rose 60% to $132.5 million, driven by battery-grade lithium volumes and pricing. Six-month sales rose 34% to $602.2 million and adjusted EBITDA rose 49% to $252.6 million.
- Bromine Specialties: Q2 sales declined 1% to $203.9 million and adjusted EBITDA declined 7% to $62.1 million due to unfavorable pricing, mix and higher costs. Six-month sales increased 5% and adjusted EBITDA increased 2%.
- Refining Solutions: Q2 sales increased 3% to $184.2 million, but adjusted EBITDA declined 19% to $50.1 million because of unfavorable mix and higher costs. Six-month sales increased 6%, while adjusted EBITDA declined 15%.
- All Other: Q2 sales declined 39% to $30.7 million and six-month sales declined 49% to $63.1 million, primarily reflecting the divestiture of the minerals-based flame retardants and specialty chemicals business.
- Cost structure: Q2 included $11.9 million of Jiangli inventory-markup expense, $6.5 million of acquisition and integration costs, $4.2 million of restructuring costs and $4.9 million of multiemployer-plan shortfall contributions. Six-month amounts were $22.5 million, $20.8 million, $17.1 million and $4.9 million, respectively.
Debt, Liquidity and Capital Allocation
- Total debt was $1.729 billion at June 30, 2017, including $307.0 million of commercial paper, compared with $2.369 billion at December 31, 2016. The noncurrent portion declined to $1.421 billion from $2.122 billion.
- Using proceeds from the Chemetall sale, the company repaid its 3.00% senior notes, €307.0 million of 1.875% senior notes and $174.7 million of 4.50% senior notes. The repayments generated a $52.8 million loss on early extinguishment of debt.
- No borrowings were outstanding under the $1.0 billion revolving credit facility. The company reported $693.0 million of borrowing capacity under the commercial paper program and revolving facility, plus $222.5 million under other credit lines, subject to covenants.
- The company paid $250.0 million under an accelerated share repurchase agreement and retired 2,341,083 shares during the first half. A quarterly dividend of $0.32 per share was declared, representing a 5% increase from the 2016 quarterly rate.
- Capital expenditures were $97.8 million in the first half. Management expected 2017 capital expenditures of approximately $325 million to $375 million, primarily for lithium growth and capacity expansion.
Guidance, Outlook, Commentary and Risks
Management expected strong year-over-year Lithium and Advanced Materials growth for the remainder of 2017, supported by battery-grade demand, additional lithium conversion capacity and pricing. It expected Bromine Specialties to benefit from volume and productivity gains but remained cautious because of low oil prices, drilling-fluid demand and supply-demand conditions. Refining Solutions was expected to benefit from catalyst change-outs and clean-fuels demand, while facing maintenance shutdowns, product-mix pressure and higher input costs.
Management expected a 2017 global effective tax rate of approximately 18.3%, subject to geographic earnings mix and tax-law changes. It stated that cash on hand, operating cash flow and borrowings should be sufficient for operating expenses, debt service, capital expenditures, pension contributions, dividends and planned share repurchases for the foreseeable future.
- Key risks include lithium capacity-expansion costs, lithium and specialty-chemical pricing, raw-material and energy costs, customer demand and concentration, low oil prices, foreign-exchange volatility, competition, regulatory and environmental requirements, chemical-manufacturing hazards, cyber incidents, acquisitions and integration, and access to financing.
- Recorded environmental liabilities were $36.0 million; management estimated additional potential environmental remediation costs of up to approximately $18 million before tax.
- Off-balance-sheet guarantees and letters of credit totaled approximately $56.8 million. Management stated that legal, indemnity and environmental matters were not expected to have a material consolidated impact, although individual periods could be affected.
- The company adopted accounting guidance affecting share-based payment tax benefits in 2017, reducing tax expense by $0.6 million in Q2 and $4.7 million for the first half. Revenue-recognition guidance was expected to be adopted in the first quarter of 2018 using the modified retrospective method.
Most Important Facts to Verify
- Whether lithium pricing and battery-grade volume growth continue to offset capacity-expansion costs and Jiangli-related inventory-markup expenses.
- The sustainability of adjusted EBITDA growth, particularly given declines in Bromine Specialties and Refining Solutions adjusted EBITDA during Q2.
- Conversion of earnings into operating cash flow after the unusually large tax payment related to the Chemetall divestiture and the increase in inventory.
- Debt refinancing and liquidity needs, including the $307 million of short-term commercial paper and available revolving capacity.
- Actual 2017 capital expenditures versus the $325 million to $375 million expectation and progress on lithium capacity expansion.
- Changes in the effective tax rate, foreign-exchange impacts, environmental liabilities and unresolved indemnification or litigation matters.