Albemarle Corporation 2011 First-Quarter Form 10-Q Summary
Business context and reporting period
Albemarle is a global specialty chemicals company operating through Polymer Solutions, Catalysts, and Fine Chemistry. This unaudited Form 10-Q covers the three months ended March 31, 2011, compared with the first quarter of 2010.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $696.5 million | $580.3 million | 20% |
| Gross profit | $233.0 million | $164.5 million | 42% |
| Gross margin | 33.5% | 28.3% | Up 520 basis points |
| Operating profit | $142.4 million | $76.3 million | 87% |
| Operating margin | 20.4% | 13.1% | Up 730 basis points |
| Net income attributable to Albemarle | $106.6 million | $63.3 million | 68% |
| Diluted EPS | $1.15 | $0.69 | 67% |
| Cash flow from operations | $46.6 million | $18.1 million | Up $28.5 million |
Sales growth reflected favorable pricing of 12% and favorable volume of 8%. Segment sales increased 19% in Polymer Solutions, 15% in Catalysts, and 30% in Fine Chemistry. Segment income increased 66%, 32%, and 151%, respectively.
The effective tax rate was 24.2%, compared with 23.4% in the prior-year quarter. Equity income from unconsolidated investments increased to $12.8 million from $10.3 million. Net income attributable to noncontrolling interests increased to $7.2 million from $1.6 million, primarily due to improved results at Jordan Bromine Company.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $441.0 million at March 31, 2011, down from $529.7 million at December 31, 2010.
- Operating cash flow of $46.6 million funded $31.9 million of capital expenditures, $10.7 million of equity and other investments, $100.6 million of debt repayments, and $12.9 million of shareholder dividends.
- Total long-term debt, including the current portion, was $767.7 million, down from $860.9 million at year-end 2010. The reduction primarily reflected debt repayments.
- The company had no borrowings outstanding under its $675.0 million unsecured revolving credit facility and reported access to more than $831.0 million under that facility and other existing credit lines, subject to covenants.
- Management stated that the company was in compliance with its debt covenants and expects cash, operating cash flow, and borrowing capacity to satisfy foreseeable operating, debt service, capital spending, pension, and dividend requirements.
- Capital expenditures are expected to be approximately $150 million for 2011.
- Expected 2011 pension contributions were approximately $55 million; $50.8 million had already been contributed during the quarter.
Material changes versus the prior comparable period
- Profitability improved substantially because of higher pricing, stronger volumes, favorable production rates, and the absence of the $7.0 million restructuring charge recorded in Q1 2010.
- Gross margin expanded to 33.5% from 28.3%, while operating margin increased to 20.4% from 13.1%.
- SG&A increased 10% and research and development expense increased 20%, mainly due to higher personnel-related costs and continued investment.
- Interest and financing expense increased 62% to $9.6 million, primarily because of higher average borrowing costs.
- Debt declined by approximately $93.2 million during the quarter, but cash declined by approximately $88.6 million because debt repayment and investment uses exceeded operating cash generation.
- The quarterly dividend increased to $0.165 per share from $0.14 per share.
- Foreign currency translation generated a $74.3 million favorable comprehensive-income adjustment, contributing to the reduction in accumulated other comprehensive loss.
Guidance, outlook, risks, contingencies, and unusual items
Management expects strong demand and tight supply conditions to continue and expects the fundamentals supporting 2010 performance to remain in place, positioning the company for solid earnings growth in 2011. No specific full-year earnings or revenue guidance was provided.
- Management expects a 2011 effective tax rate of approximately 24.2%, subject to the geographic mix of earnings.
- Raw-material, energy, pension, and personnel costs remain key potential headwinds. The company is using pricing actions and cost pass-through mechanisms to offset inflation, including higher rare-earth costs affecting Catalysts.
- The March 2011 earthquake and tsunami in Japan had no material first-quarter impact, but potential global effects remained under review.
- Environmental liabilities recorded on the balance sheet totaled $14.1 million. Management estimated that additional remediation costs could be up to approximately $17.3 million before tax. Timing and ultimate costs remain uncertain.
- An unresolved EPA Notice of Violation concerning the Orangeburg, South Carolina facility could result in fines, penalties, capital expenditures, or a combination thereof; the financial impact could not be predicted with certainty.
- Restructuring liabilities were $7.3 million at March 31, 2011. Approximately $1.0 million of new restructuring charges were recorded during the quarter, with payments under existing programs expected through 2014.
- Off-balance-sheet bank guarantees and letters of credit totaled approximately $34.2 million and were not expected to materially affect liquidity.
- Principal risks include economic conditions, customer demand and concentration, competition, raw-material availability and pricing, foreign exchange, regulation, litigation, environmental matters, political instability, natural disasters, interest rates, pension obligations, and access to capital.
Most important facts for investors to verify
- Whether pricing increases and cost pass-through mechanisms continue to offset raw-material and energy inflation.
- Whether strong demand and tight supply conditions persist across the three operating segments.
- Progress against the approximately $150 million 2011 capital expenditure plan and the company’s ability to convert higher earnings into operating cash flow.
- Debt repayment plans, availability under the revolving credit facility, and continued compliance with financial covenants.
- The final resolution and potential cost of the Orangeburg EPA matter and other environmental remediation obligations.
- Actual full-year earnings, tax rate, pension contributions, and cash flow compared with management’s qualitative outlook.