Albemarle Corporation 2014 Form 10-K Summary
Business Context and Reporting Period
Albemarle is a global specialty chemicals manufacturer serving petroleum refining, electronics, construction, automotive, lubricants, pharmaceutical, crop protection, food safety and custom chemistry markets. Fiscal-year results cover the year ended December 31, 2014; the filing also provides fourth-quarter information. 2014 results reflect the pre-Rockwood business structure and do not include Rockwood’s operating results.
- 2014 reportable segments: Performance Chemicals and Catalyst Solutions.
- Operations served approximately 2,500 customers in approximately 100 countries through 56 production and research facilities, including facilities acquired from Rockwood after year-end.
- The Rockwood acquisition closed January 12, 2015 for approximately $5.6 billion, consisting of approximately $3.6 billion in cash and $2.0 billion in equity.
Financial and Operating Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $2.446 billion | $2.394 billion | Up 2% |
| Gross profit | $770.8 million | $850.5 million | Down 9% |
| Gross margin | 31.5% | 35.5% | Down 4.0 points |
| Operating profit | $271.3 million | $576.7 million | Down 53% |
| Operating margin | 11.1% | 24.1% | Down 13.0 points |
| Net income from continuing operations | $230.4 million | $435.7 million | Down 47% |
| Net income attributable to Albemarle | $133.3 million | $413.2 million | Down 68% |
| Diluted EPS | $1.69 | $4.90 | Down 66% |
| Operating cash flow | $492.6 million | $432.9 million | Up 14% |
| Capital expenditures | $110.6 million | $155.3 million | Down 29% |
Reported results were significantly affected by pension and other postretirement benefit actuarial losses, acquisition-related costs, financing costs and the loss on the divestiture of the antioxidant, ibuprofen and propofol businesses. Excluding pension and OPEB mark-to-market effects, gross margin was 33.0% in 2014 versus 33.7% in 2013, and SG&A as a percentage of sales was 10.7% versus 10.6%.
- Performance Chemicals sales were $1.352 billion, down 3%; segment income was $289.1 million, down 9%.
- Catalyst Solutions sales were $1.094 billion, up 9%; segment income was $250.1 million, up 15%.
- Research and development expense was $88.3 million, up from $82.2 million.
- Cash and cash equivalents were $2.490 billion at year-end, compared with $477.2 million in 2013.
- Total debt was $2.934 billion, including $711.1 million classified as current and $2.223 billion classified as long-term.
- Net current assets were approximately $2.21 billion, compared with $1.05 billion in 2013.
- The company paid $84.1 million in dividends and repurchased $150.0 million of common stock, representing approximately 2.2 million shares.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, primarily from favorable volume growth in Catalyst Solutions, while Performance Chemicals volumes and pricing declined.
- Gross profit and operating profit fell sharply because of higher manufacturing and SG&A costs, pension and OPEB actuarial losses, restructuring charges and Rockwood acquisition costs.
- 2014 included $130.8 million of after-tax pension and OPEB actuarial losses, compared with an $88.3 million after-tax actuarial gain in 2013.
- Discontinued operations produced a $69.5 million after-tax loss in 2014, compared with $4.1 million of income in 2013. The loss included a $65.7 million after-tax loss on the sale of the divested businesses.
- Debt increased substantially because of financing arranged for the Rockwood acquisition. Albemarle issued approximately $1.9 billion of senior notes in late 2014.
- Other comprehensive income changed from $31.3 million of income in 2013 to $178.7 million of loss in 2014, primarily because of foreign-currency translation losses.
Guidance, Outlook, Risks and Unusual Items
Management expected 2015 Performance Chemicals sales to be broadly comparable with 2014, while citing soft demand, cautious customer inventories, lower oil prices and a stronger U.S. dollar. Management expected continued growth in Catalyst Solutions, supported by refinery catalyst demand, tighter fuel standards and long-term plastics demand, but noted uncertainty regarding crude slate changes and catalyst replacement timing.
- 2015 expected capital expenditures were approximately $235 million.
- Management expected a 2015 global effective tax rate of approximately 25%, subject to geographic earnings mix and legislative changes.
- Management expected approximately $200 million of additional Rockwood acquisition and integration costs over the following two years.
- Management’s stated priority for the next 18 to 24 months was deleveraging following the Rockwood acquisition.
- Management expected annual savings of up to $3 million from reducing high-cost aluminum alkyl supply capacity, beginning within two years.
- In 2015, the company planned to realign into Performance Chemicals, Refining Solutions and Chemetall Surface Treatment and evaluate strategic alternatives, including divestitures, for certain product lines.
- Key risks include raw-material and energy price volatility, inability to pass through cost increases, cyclical end markets, foreign exchange movements, competition, environmental and product regulation, chemical manufacturing hazards, cybersecurity, pension funding requirements and integration of Rockwood.
- HBCD sales represented approximately 0.7% of 2014 sales and faced potential European restrictions or bans; Albemarle was developing GreenCrest as a substitute.
- Environmental liabilities recorded at year-end were approximately $9.2 million, with reasonably possible additional remediation costs estimated at up to approximately $12 million before tax.
- Rockwood-related shareholder litigation was provisionally settled, subject to court approval. A separate appraisal action involving approximately 882,000 Rockwood shares was filed in February 2015, and its outcome could not be predicted.
Most Important Facts for Investors to Verify
- Reconcile 2014 reported earnings with the major pension/OPEB actuarial loss, divestiture loss, restructuring charges and Rockwood acquisition costs.
- Assess post-acquisition leverage, debt maturities, interest expense and the company’s progress toward deleveraging.
- Verify the preliminary purchase-price allocation, pro forma results and integration costs for Rockwood in subsequent filings.
- Monitor Performance Chemicals demand, bromine pricing, HBCD replacement progress and exposure to lower oil prices.
- Evaluate Catalyst Solutions volume growth and sensitivity to refinery crude slates, catalyst replacement cycles and raw-material prices.
- Review foreign-currency exposure, particularly to the euro, Japanese yen, Chinese renminbi and Brazilian real.
- Track environmental, regulatory, tax and merger-related contingencies, including the Rockwood appraisal proceeding.
- Confirm that liquidity remains adequate after funding the acquisition, repaying acquisition-related borrowings and meeting capital expenditure, dividend and pension obligations.