Albemarle Corporation — Form 10-Q Summary
Business Context and Reporting Period
Albemarle is a global specialty chemicals producer operating through Polymer Solutions, Catalysts, and Fine Chemistry. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Financial Performance and Liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $661.2 million | $723.0 million | $2.058 billion | $2.162 billion |
| Gross profit | $214.8 million | $258.0 million | $705.3 million | $743.0 million |
| Gross margin | 32.5% | 35.7% | 34.3% | 34.4% |
| Operating profit | $128.4 million | $160.3 million | $329.0 million | $451.8 million |
| Operating margin | 19.4% | 22.2% | 16.0% | 20.9% |
| Net income attributable to Albemarle | $99.3 million | $116.1 million | $245.0 million | $336.8 million |
| Diluted EPS | $1.10 | $1.28 | $2.72 | $3.66 |
| Cash flow from operations | Not separately provided | Not separately provided | $306.5 million | $285.5 million |
- Cash and cash equivalents were $402.6 million at September 30, 2012, down from $469.4 million at December 31, 2011.
- Total long-term debt was $713.7 million, including $12.6 million due within one year; the noncurrent portion was $701.2 million versus $749.3 million at year-end 2011.
- The company had no borrowings under its $750 million revolving credit facility and reported access to more than $985 million under that facility and other lines of credit, subject to covenants.
- Capital expenditures were $218.7 million through nine months. Management expected full-year 2012 capital expenditures of $275 million to $300 million.
- Current assets were $1.387 billion versus current liabilities of $382.5 million. Inventories increased to $491.9 million from $431.5 million at year-end.
- The quarterly dividend was increased to $0.20 per share. Albemarle repurchased 680,000 shares for $40.5 million during the first nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 9%, operating profit declined 20%, net income attributable to Albemarle declined 15%, and diluted EPS declined 14% year over year.
- Nine-month sales declined 5%, while operating profit fell 27% and net income attributable to Albemarle fell 27%; diluted EPS decreased 26%.
- Third-quarter gross margin contracted by 3.2 percentage points, primarily from lower metals surcharges and related cost impacts in refinery catalysts, pricing declines, foreign exchange, and lower fixed-cost absorption.
- Polymer Solutions sales and segment income declined 11% and 20%, respectively, in the third quarter; nine-month sales and segment income declined 13% and 20%.
- Catalysts sales and segment income declined 16% and 40% in the third quarter; nine-month sales and segment income declined 6% and 13%, reflecting lower metals surcharges, mix changes, foreign exchange, and weaker joint-venture results.
- Fine Chemistry was the principal growth area: third-quarter sales increased 8% and segment income increased 39%; nine-month sales increased 9% and segment income increased 28%.
- Operating cash flow increased despite lower earnings, primarily because of lower pension contributions and other favorable items, partly offset by unfavorable working-capital changes.
Guidance, Outlook, Risks, and Unusual Items
- Management expected continued global economic uncertainty through the remainder of 2012, with particular weakness in electronics and European construction markets. Lower production rates could pressure sales and profitability through the remainder of 2012 and potentially into 2013.
- Management forecast a 2012 global effective tax rate of approximately 25.3%.
- The company exited its phosphorous flame-retardants business and recorded $94.7 million of pretax charges, or $73.6 million after tax. The charges included approximately $57 million of asset write-offs, $12 million of foreign-currency translation write-offs, $13 million of severance, $9 million of remediation costs, and $4 million of other exit costs.
- Cash outflows related to the business exit were expected to total approximately $5 million to $15 million after tax, with payments continuing through the expected restructuring completion date in 2014. Management expected favorable profit effects beginning in the fourth quarter of 2012.
- A $6.5 million pension settlement charge was recorded in connection with the retirement of the former CEO and executive chairman. Pension and postretirement expense could exceed 2011 levels by up to $20 million for the full year.
- Post-quarter-end pension plan amendments were expected to produce a fourth-quarter 2012 curtailment gain of $4 million to $6 million and a one-time defined-contribution plan payment of $10 million to $11 million.
- Recorded environmental liabilities totaled $20.5 million. Management estimated additional remediation costs could be up to approximately $16 million before tax, although it did not expect a material annual consolidated impact.
- The company is defending EPA litigation involving alleged environmental and emissions-related violations at its Orangeburg, South Carolina facility. The outcome and potential financial impact could not be predicted, although management did not expect a material adverse effect.
- Key operating risks include economic and end-market weakness, raw-material and energy costs, metals surcharge volatility, foreign exchange, customer demand and timing, regulation, litigation, environmental liabilities, pension obligations, joint-venture performance, and access to financing.
Important Facts for Investors to Verify
- Whether the phosphorous flame-retardants exit delivers the expected profitability improvement and remains within the estimated cash-cost range.
- Recovery or further deterioration in electronics, European construction, refinery catalysts, and other affected end markets.
- Trends in metals surcharges, rare-earth-related costs, pricing, product mix, and fixed-cost absorption.
- Execution and capital requirements for the Yeosu, Korea expansion, Saudi Arabia joint venture, and Jordan bromine expansion.
- Working-capital levels, particularly the significant increase in inventories, and the pace of cash conversion.
- Debt maturities beginning in 2015, compliance with credit-facility covenants, and continued availability of committed liquidity.
- Environmental remediation estimates, EPA litigation exposure, pension funding and the effects of the post-quarter-end plan amendments.
- The sustainability of earnings excluding the $4.5 million tax benefit, incentive-compensation adjustments, litigation settlement gain, charitable contribution, pension charge, and phosphorous business exit charges.