Albemarle Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals company serving energy storage, petroleum refining, consumer electronics, construction, automotive, pharmaceuticals, crop protection and other markets. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the same period in 2017. Reportable segments were Lithium, Bromine Specialties and Catalysts; the former Performance Catalyst Solutions product category was combined with Refining Solutions to form Catalysts.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $821.6 million | $722.1 million | +14% |
| Gross profit | $305.0 million | $255.0 million | +20% |
| Gross margin | 37.1% | 35.3% | +180 basis points |
| Operating profit | $182.6 million | $121.7 million | +50% |
| Operating margin | 22.2% | 16.9% | +530 basis points |
| Net income attributable to Albemarle | $131.8 million | $51.2 million | +157% |
| Diluted EPS | $1.18 | $0.45 | +162% |
| Adjusted EBITDA | $248.7 million | $211.4 million | +18% |
| Cash flow from operations | $121.6 million | $82.6 million | +47% |
| Capital expenditures | $131.8 million | $54.1 million | Higher investment |
Net sales growth reflected $34.6 million of higher volumes, primarily in Lithium, $45.1 million of favorable pricing and $19.8 million of favorable foreign currency effects. The effective tax rate was 14.7%, compared with 22.4% in the prior-year quarter, including discrete benefits related to the U.S. Tax Cuts and Jobs Act and stock-based compensation.
At March 31, 2018, cash and cash equivalents were $692.2 million, down from $1.14 billion at December 31, 2017. Total debt was approximately $1.48 billion, including $38.5 million of commercial paper, compared with approximately $1.84 billion at year-end. The company had no borrowings under its $1.0 billion revolving credit agreement and reported compliance with debt covenants. Available borrowing capacity under the commercial paper program and revolving facility was approximately $961.5 million, subject to covenants.
Segment performance and material changes
- Lithium: Sales increased 38% to $298.0 million and adjusted EBITDA increased 31% to $131.0 million, driven by higher volumes, favorable pricing and currency effects.
- Bromine Specialties: Sales increased 3% to $225.6 million and adjusted EBITDA increased 2% to $70.0 million. Pricing and currency benefits were partly offset by lower volumes caused by elemental bromine constraints.
- Catalysts: Sales increased 3% to $260.7 million, while adjusted EBITDA declined 3% to $67.8 million. Higher pricing and favorable currency effects were offset by lower volumes and somewhat weaker joint-venture performance.
- SG&A declined 7% and research and development expense declined 14%, partly because Q1 2017 included acquisition-related and restructuring costs.
- Interest and financing expense declined by $55.0 million, primarily because Q1 2017 included a $52.8 million loss on early extinguishment of debt.
- Net income benefited from lower acquisition, inventory-markup and restructuring costs than in Q1 2017, but included a $17.6 million legal accrual and $15.6 million of environmental charges.
- Working capital used $95.1 million of operating cash, reflecting higher receivables and inventory builds, particularly in Lithium and Catalysts.
- The quarterly dividend was increased 5% to $0.335 per share.
Guidance, outlook, risks and unusual items
- Management expected 2018 capital expenditures of approximately $800 million to $900 million, primarily for Lithium growth and capacity expansion, productivity and continuity projects.
- Management expected the 2018 global effective tax rate to be approximately 23.1%, subject to geographic earnings mix, tax-law changes and further evaluation of the Tax Cuts and Jobs Act.
- Lithium was expected to deliver continued strong year-over-year growth, supported by battery demand, pricing and additional conversion capacity. Albemarle received approval to increase its Chilean lithium quota to as much as 145,000 metric tons of lithium carbonate equivalent annually through 2043.
- Bromine Specialties was expected to achieve low- to mid-single-digit sales and profitability growth, although drilling-completion-fluid demand remained subdued and raw-material costs could rise if oil prices increased.
- Catalysts faced higher raw-material costs, a temporary key-material shortage in curatives and order-timing effects. Management expected productivity gains and higher organometallics volumes to support stabilization.
- On April 3, 2018, Albemarle completed the sale of the polyolefin catalysts and components portion of PCS to W.R. Grace for approximately $416 million in cash. Management expected to record a gain in Q2 2018.
- The company voluntarily self-reported potential improper payments involving third-party sales representatives in its Refining Solutions business to the DOJ and SEC. The duration, outcome and costs were not determinable, although management did not expect any resulting fines or other losses to materially affect liquidity or financial condition.
- Environmental remediation liabilities totaled $54.4 million at March 31, 2018. Management estimated an additional possible exposure of $10 million to $20 million before tax beyond recorded amounts.
- A jury verdict related to a 2014 sales agreement resulted in a recorded $17.6 million accrual; post-trial motions were pending.
- The company adopted the revenue-recognition standard effective January 1, 2018, with no material initial impact. Adoption of another tax-accounting standard reduced retained earnings by $11.2 million.
Most important facts for investors to verify
- Whether Lithium pricing, volumes and capacity expansions support management’s projected 2018 growth.
- The timing and amount of the gain from the PCS divestiture and the use of its approximately $416 million proceeds.
- Progress, potential penalties and financial exposure from the DOJ and SEC investigations concerning third-party representatives.
- Development of environmental and litigation liabilities, including amounts beyond the $54.4 million environmental reserve and the $17.6 million legal accrual.
- Whether planned capital expenditures of $800 million to $900 million can be funded while maintaining debt reduction, dividends and other shareholder returns.
- The sustainability of Q1 margins and the 14.7% effective tax rate, which benefited from discrete tax items.
- Execution against Catalysts’ raw-material, supply-constraint and order-timing risks, as well as Bromine Specialties’ elemental bromine constraints.