Albemarle Corporation — Q1 2019 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals producer serving energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals, crop protection and custom chemistry markets. Its reportable segments are Lithium, Bromine Specialties and Catalysts. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $832.1 million | $821.6 million | Up 1% |
| Gross profit | $283.5 million | $305.0 million | Down 7% |
| Gross margin | 34.1% | 37.1% | Down 3.0 points |
| Operating profit | $155.2 million | $182.6 million | Down 15% |
| Operating margin | 18.6% | 22.2% | Down 3.6 points |
| Net income | $151.5 million | $138.9 million | Up 9% |
| Net income attributable to Albemarle | $133.6 million | $131.8 million | Up 1% |
| Diluted EPS | $1.26 | $1.18 | Up 7% |
| Adjusted EBITDA | $225.9 million | $248.7 million | Down 9% |
| Cash flow from operations | $54.9 million | $121.6 million | Down 55% |
| Capital expenditures | $216.1 million | $131.8 million | Up 64% |
Net income attributable to Albemarle was 16.1% of sales versus 16.0% in the prior-year quarter. The effective tax rate increased to 24.4% from 14.7%, primarily because of geographic earnings mix and discrete tax expenses related to uncertain tax positions. Equity income from unconsolidated investments increased to $35.2 million from $20.7 million, primarily reflecting stronger Windfield joint venture and Catalysts results.
Segment performance
- Lithium: Sales declined 2% to $291.9 million and adjusted EBITDA declined 12% to $115.6 million. Lower volume resulted from production issues at the La Negra, Chile site following a rain event; higher input costs also pressured profitability. Favorable pricing partly offset these effects.
- Bromine Specialties: Sales increased 10% to $249.1 million and adjusted EBITDA increased 12% to $78.6 million, driven by stronger volume and pricing in flame retardants and other derivatives. Higher production and raw material costs partially offset the improvement.
- Catalysts: Sales decreased 3% to $251.6 million and adjusted EBITDA decreased 11% to $60.1 million. The comparison was affected by the Polyolefin Catalysts divestiture, unfavorable currency, and higher raw material costs, partly offset by higher refining catalyst volume and pricing.
- All Other: Sales increased 6% to $39.5 million and adjusted EBITDA increased to $7.2 million from $3.9 million.
- Corporate: Adjusted EBITDA expense increased to $35.7 million from $24.0 million, primarily because of higher professional services spending and unfavorable currency effects.
Cash flow, liquidity and debt
Cash and cash equivalents declined to $465.3 million at March 31, 2019 from $555.3 million at December 31, 2018. Operating cash flow was reduced by a $122.9 million working-capital outflow, mainly from inventory build-up in Lithium and Catalysts for expected higher sales. Capital spending was $216.1 million, and management expects full-year 2019 capital expenditures of approximately $800 million to $900 million, principally for Lithium growth, mining resource development, capacity expansion and productivity projects.
Total debt was approximately $1.82 billion, including $425.0 million of commercial paper with a weighted-average interest rate of approximately 2.89% and weighted-average maturity of 42 days. The company had no borrowings under its $1.0 billion revolving credit facility and reported $575.0 million of availability under the commercial paper program and revolving facility, plus $579.9 million under other credit lines, subject to applicable conditions and covenants. Management stated that the company was in compliance with its debt covenants.
Foreign subsidiaries held $436.5 million of the company’s cash balance. Management expects cash on hand, operating cash flow, divestiture proceeds and borrowings to fund operations, debt service, capital expenditures, dividends, pension contributions and potential acquisitions. The announced approximately $1.15 billion Wodgina Project acquisition was expected to be funded primarily with new debt.
Material changes and unusual items
- Net sales benefited from favorable pricing and higher Bromine Specialties and Catalysts volume, but were reduced by the Polyolefin Catalysts divestiture, unfavorable currency and lower Lithium volume.
- Margins declined because of higher Lithium input costs, higher raw material costs in Bromine Specialties and Catalysts, currency effects, and increased corporate expenses.
- Other income included an $11.1 million gain on the sale of Pasadena, Texas land. The prior-year quarter included a $17.6 million legal accrual and $15.6 million of environmental charges, making the year-over-year comparison favorable.
- The company adopted the new lease standard on January 1, 2019, recording $139.1 million of additional net lease assets and liabilities. The adoption did not affect net income or cash flows.
- The quarterly dividend was increased 10% to $0.3675 per share.
Guidance, outlook and risks
Management expects continued strong year-over-year Lithium growth for the remainder of 2019, led by battery-grade demand and increased conversion capacity. It expects continued Bromine Specialties sales and profitability growth, while drilling completion-fluid demand is expected to remain stable but low with sustained low oil prices. Catalysts is expected to benefit from demand for transportation fuels, refinery start-ups, cleaner fuels and heavier crude processing. Management expects a 2019 global effective tax rate of 23% to 24%.
Key risks include global economic weakness, customer demand and order timing, raw material and energy costs, foreign currency volatility, oil prices, regulatory changes, competition, political instability, chemical manufacturing hazards, cyber incidents, environmental liabilities, litigation, execution of acquisitions and divestitures, and access to credit markets.
The company continues to cooperate with the U.S. Department of Justice, SEC and Dutch Public Prosecutor regarding potential improper payments by third-party sales representatives in its Refining Solutions business. The duration, outcome and costs are not predictable. Management does not currently expect any resulting fines, penalties, disgorgement or other losses to materially affect financial condition or liquidity.
Recorded environmental liabilities were $48.3 million at March 31, 2019. Management estimated a reasonable possibility of an additional $10 million to $35 million of remediation costs above recorded amounts, principally related to a formerly owned site. The company also reported approximately $72.7 million of bank guarantees and letters of credit.
Investor verification checklist
- Verify the pace and cost of Lithium capacity expansion, including the La Negra production disruption and the proposed Wodgina Project acquisition.
- Monitor whether pricing offsets higher raw material, input and energy costs and whether gross margins recover.
- Assess working-capital conversion, inventory levels and operating cash flow against the planned $800 million to $900 million of 2019 capital expenditures.
- Review commercial paper refinancing needs, credit-facility availability and compliance with the 3.50-to-1 funded-debt-to-EBITDA covenant.
- Track the DOJ, SEC and Dutch Public Prosecutor investigations and related potential penalties or remediation costs.
- Evaluate environmental remediation exposure, including the disclosed potential $10 million to $35 million additional cost range.
- Reconcile adjusted EBITDA with GAAP net income and distinguish recurring operating performance from divestiture, legal, environmental, currency and other unusual items.