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ALB > SEC Filings for ALB > Form 10-Q on 19-Apr-2013All Recent SEC Filings

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Form 10-Q for ALBEMARLE CORP


19-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of our financial condition and results of operations since December 31, 2012. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading "Financial Condition and Liquidity" on page 28.

Forward-looking Statements

Some of the information presented in this Quarterly Report on Form 10-Q, including the documents incorporated by reference, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on our current expectations, which are in turn based on assumptions that we believe are reasonable based on our current knowledge of our business and operations. We have used words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and variations of such words and similar expressions to identify such forward-looking statements.

These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. Therefore, there can be no assurance that our actual results will not differ materially from the results and expectations expressed or implied in the forward-looking statements. Factors that could cause actual results to differ materially include, without limitation:

changes in economic and business conditions;

changes in financial and operating performance of our major customers, industries and markets served by us;

the timing of orders received from customers;

the gain or loss of significant customers;

competition from other manufacturers;

changes in the demand for our products;

limitations or prohibitions on the manufacture and sale of our products;

availability of raw materials;

changes in the cost of raw materials and energy, and our ability to pass through such increases;

acquisitions and divestitures, and changes in performance of acquired companies;

changes in our markets in general;

fluctuations in foreign currencies;

changes in laws and government regulation of our operations or our products;

the occurrence of claims or litigation;

the occurrence of natural disasters;

the inability to maintain current levels of product or premises liability insurance or the denial of such coverage;

political unrest affecting the global economy, including adverse effects from terrorism or hostilities;

political instability affecting our manufacturing operations or joint ventures;

changes in accounting standards;

the inability to achieve results from our global manufacturing cost reduction initiatives as well as our ongoing continuous improvement and rationalization programs;

changes in jurisdictional mix of our earnings and changes in tax laws and rates;


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changes in monetary policies, inflation or interest rates that may impact our ability to raise capital or increase our cost of funds, impact the performance of our pension fund investments and increase our pension expense and funding obligations;

volatility and substantial uncertainties in the debt and equity markets;

technology or intellectual property infringement; and

the other factors detailed from time to time in the reports we file with the SEC.

We assume no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. The following discussion should be read together with our consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

Overview

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that meet customer needs across an exceptionally diverse range of end markets including the petroleum refining, consumer electronics, plastics/packaging, construction, automotive, lubricants, pharmaceuticals, crop protection, food safety and custom chemistry services markets. We are committed to global sustainability and are advancing responsible eco-practices and solutions in our three business segments. We believe that our commercial and geographic diversity, technical expertise, innovative capability, flexible, low cost global manufacturing base, experienced management team and strategic focus on our core base technologies will enable us to maintain leading market positions in those areas of the specialty chemicals industry in which we operate.

Secular trends favorably impacting demand within the end markets that we serve combined with our diverse product portfolio, broad geographic presence and customer-focused solutions will continue to be key drivers to our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace. We believe our disciplined cost reduction efforts, ongoing productivity improvements and strong balance sheet will position us well to take advantage of strengthening economic conditions as they occur while softening the negative impact of the current challenging economic environment.

First Quarter 2013

During the first quarter of 2013:

We achieved quarterly earnings of $0.94 per share (on a diluted basis), down 26% from first quarter 2012 results.

Our net sales for the quarter were $641.6 million, down 10% from net sales of $711.7 million in the first quarter of 2012.

Our quarterly dividend was increased to $0.24 per share of common stock ($0.96 annually).

Our Board of Directors authorized an increase in the number of shares the Company is permitted to repurchase under our share repurchase program, pursuant to which the Company is now permitted to repurchase up to a maximum of 15 million shares, including those shares previously authorized but not yet repurchased. We repurchased approximately 1.0 million shares of our common stock pursuant to the terms of our share repurchase program.

Jordan Bromine Company Limited (JBC), our consolidated joint venture with operations in Safi, Jordan, completed its first phase of expansion which doubles the site's bromine production capacity. The second phase of the expansion will double the current capacity of key bromine derivatives, hydrobromic acid, calcium bromide and sodium bromide, and is scheduled for commissioning in May 2013.

We approved and began a $30 million expansion project at our Tyrone, Pennsylvania manufacturing site to add new capacity for custom manufacturing projects. The first increment of new capacity is expected to be operational in the second half of 2014.


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Outlook

As we expected, current dynamics in both the global economy and in select businesses have resulted in continued headwinds as we entered 2013, and could potentially continue to impact our results beyond the first quarter. Despite the current trends, our business fundamentals are sound and we are strategically well-positioned as we remain focused on increasing sales volumes, managing costs and delivering value to our customers. We believe that when the end markets we serve begin to stabilize and resume growth, our businesses will respond quickly to the improved market conditions and new business opportunities.

Polymer Solutions: Sales volumes in many of our core products were favorable in the first quarter of 2013 compared to the prior year quarter, offset by lower prices in our Flame Retardants and Additives businesses. In spite of this, year-over-year revenue was still down, driven mainly by our exit of the phosphorus flame retardants business in the second quarter of 2012. We closely monitor customer order patterns and other key indicators in our business, some of which show trends that indicate the current pace of business could continue beyond the first quarter of 2013. These trends, should they continue, will likely have adverse impacts on our net sales and profitability, including impacts from operating our production assets below optimum levels.

Despite these current trends and concerns, we believe that the combination of solid, long-term business fundamentals with our competitive position, product innovations and effective management of raw material inflation will enable our business to manage through periods of end market challenges and to capitalize on opportunities that will come with a sustained economic recovery. Further, we believe our position has been strengthened by our recent exit from the phosphorus flame retardants business, which should yield improvements in our future profitability.

On a long-term basis, we continue to believe that improving global standards of living and the potential for increasingly stringent fire safety regulations in developing markets are likely to drive continued demand for fire safety products. Further, we continue to focus on globalization in this segment, with our antioxidants facilities in China positioning us well for growth in the Asia region. We remain well-positioned to meet future demand as global economic growth and global bromine supply/demand dynamics improve.

Catalysts: Lower metals surcharges and unfavorable volume impacts from product and customer mix in Refinery Catalyst Solutions, and lower sales volumes in Performance Catalyst Solutions, have resulted in overall lower year-over-year net sales for our Catalysts segment during the first quarter of 2013. On a longer term basis, we believe increased global demand for transportation fuels and implementation of more stringent fuel quality requirements will drive growth in our Refinery Catalyst Solutions business. In addition, we expect growth in our PCS division to come from growing global demand for plastics driven by rising standards of living and infrastructure spending, particularly in Asia and the Middle East, as well as from the LED market, driven by energy efficiency demands.

New market penetration and introduction of innovative cost-effective products for the refining and polyolefins industries continue to provide benefits. We believe our focus on advanced product development in Catalysts positions us well for commercial success, and we have introduced new value-added refining solutions and technologies that enable refiners to increase yields, a critical advantage for refiners, as well as offering advanced Ziegler-Natta catalysts to our polyolefin customers. Our marketing and research groups are tightly aligned, enabling us to continue to bring innovative technologies to the market.

We expect to leverage our existing positions in the Middle East and Asia to capitalize on growth opportunities and further develop our leading position in those emerging markets. Our joint venture in Saudi Arabia with SABIC, which is now operational, positions us to lead in the fast-growing Middle East polyolefins catalysts market. Construction at our Yeosu, South Korea site is progressing well, where lab and commercial development assets have allowed us to rapidly develop research and small-scale production facilities, adding immediate value to the metallocene polyolefin markets. The commercial facility is expected to be operational in the first half of 2013 to meet regional growth in metallocene polyolefins markets.

Fine Chemistry: In our Fine Chemistry segment, during the first quarter of 2013 we saw favorable year-over-year sales volumes in our bromine portfolio and agricultural businesses, partly offset by lower pricing in some regions. Fine Chemistry Services continues to benefit from the rapid pace of innovation and the introduction of new products, coupled with the movement by companies to outsource certain research, product development and manufacturing functions. We believe we can sustain healthy margins with continued focus on the two strategic areas in our Fine Chemistry segment - maximizing our bromine franchise value in the Performance Chemicals sector and continued growth of our Fine Chemistry Services business.


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On a longer term basis, we are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. We believe the global supply/demand gap will continue to tighten as demand for existing and new uses of bromine expand.

Our Fine Chemistry Services businesses continue to deliver strong net sales and profitability, and opportunities are expanding in the renewables, life sciences and electronic materials markets. Our pharmaceutical and crop protection businesses continue to deliver solid results. We expect product development opportunities to continue, such as partnering with ExxonMobil Corporation to make a specialty lubricant and with pharmaceutical developers like SIGA Technologies in their manufacture of the ST-246 smallpox drug.

Our technical expertise, manufacturing capabilities and speed to market allow us to develop a preferred outsourcing position serving leading chemical, renewable and life science innovators in diverse industries. We believe we will continue to generate growth in profitable niche products leveraged from this service business.

Corporate and Other: We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2013 to be approximately 24.8%; however, our rate will vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in the U.S. and other tax jurisdictions.

In the first quarter of 2013, we increased our quarterly dividend payout to $0.24 per share. Also during the first quarter of 2013, we repurchased approximately 1.0 million shares of our common stock for approximately $65 million under our existing share repurchase program, and we may periodically repurchase shares in the future on an opportunistic basis.

We remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint. Additional information regarding our products, markets and financial performance is provided at our web site, www.albemarle.com. Our web site is not a part of this document nor is it incorporated herein by reference.


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Results of Operations

The following data and discussion provides an analysis of certain significant factors affecting our results of operations during the periods included in the accompanying consolidated statements of income. Results for 2012 have been retrospectively adjusted to reflect our election to change our method of accounting for actuarial gains and losses relating to our global pension and OPEB plans in 2012.

First Quarter 2013 Compared to First Quarter 2012

Selected Financial Data (Unaudited)



                                                  Three Months Ended                           Percentage
                                                       March 31,                                 Change
                                             2013                    2012                    2013 vs. 2012
                                                (In thousands, except percentages and per share amounts)
NET SALES                               $       641,625         $       711,704                              (10 )%
Cost of goods sold                              442,035                 460,724                               (4 )%

GROSS PROFIT                                    199,590                 250,980                              (20 )%
GROSS PROFIT MARGIN                                31.1 %                  35.3 %
Selling, general and administrative
expenses                                         64,750                  74,004                              (13 )%
Research and development expenses                19,953                  19,049                                5 %

OPERATING PROFIT                                114,887                 157,927                              (27 )%
OPERATING PROFIT MARGIN                            17.9 %                  22.2 %
Interest and financing expenses                  (5,231 )                (8,734 )                            (40 )%
Other expenses, net                              (4,209 )                  (118 )                              *

INCOME BEFORE INCOME TAXES AND
EQUITY IN NET INCOME OF
UNCONSOLIDATED INVESTMENTS                      105,447                 149,075                              (29 )%
Income tax expense                               26,192                  39,028                              (33 )%
Effective tax rate                                 24.8 %                  26.2 %

INCOME BEFORE EQUITY IN NET INCOME
OF UNCONSOLIDATED INVESTMENTS                    79,255                 110,047                              (28 )%
Equity in net income of
unconsolidated investments (net of
tax)                                             10,261                   8,586                               20 %

NET INCOME                                       89,516                 118,633                              (25 )%
Net income attributable to
noncontrolling interests                         (5,529 )                (4,371 )                             26 %

NET INCOME ATTRIBUTABLE TO ALBEMARLE
CORPORATION                             $        83,987         $       114,262                              (26 )%

PERCENTAGE OF NET SALES                            13.1 %                  16.1 %

Basic earnings per share                $          0.95         $          1.28                              (26 )%

Diluted earnings per share              $          0.94         $          1.27                              (26 )%

* Percentage calculation is not meaningful.

Net Sales

For the three-month period ended March 31, 2013, we recorded net sales of $641.6 million, a decrease of 10% compared to net sales of $711.7 million for the three-month period ended March 31, 2012. This decrease was due primarily to unfavorable pricing impacts of 7% (mainly lower metals surcharges in Refinery Catalyst Solutions, lower regional pricing on bromine, and lower flame retardant pricing), lower volume impacts of 2% (mainly due to our exit of the phosphorus flame retardants business in the second quarter of 2012) and unfavorable foreign currency impacts of 1% (mainly the weaker Japanese yen).

Gross Profit

For the three-month period ended March 31, 2013, our gross profit decreased $51.4 million, or 20%, from the corresponding 2012 period due mainly to overall unfavorable pricing impacts, lower volume impacts primarily in our Performance Catalyst Solutions and hydroprocessing catalysts (HPC) businesses, unfavorable currency impacts mainly from a weaker Japanese yen, and higher manufacturing costs. These were partly offset by favorable impacts from lower variable input costs. Overall, these factors contributed to a lower gross profit margin for the three-month period ended March 31, 2013 of 31.1%, down from 35.3% for the corresponding period in 2012.


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Selling, General and Administrative Expenses

For the three-month period ended March 31, 2013, our selling, general and administrative (SG&A) expenses decreased $9.3 million, or 13%, from the three-month period ended March 31, 2012. This decrease was primarily due to lower personnel-related costs, lower sales commissions and other spending. Additionally, SG&A for the three months ended March 31, 2012 included (a) a gain of $8.1 million resulting from proceeds received in connection with the settlement of litigation (net of legal fees), and (b) an $8 million charitable contribution to the Albemarle Foundation, a non-profit organization that sponsors grants, health and social projects, educational initiatives, disaster relief, matching gift programs, scholarships and other charitable initiatives in locations where our employees live and operate.

As a percentage of net sales, SG&A expenses were 10.1% for the three-month period ended March 31, 2013, compared to 10.4% for the corresponding period in 2012.

Research and Development Expenses

For the three-month period ended March 31, 2013, our research and development (R&D) expenses increased $0.9 million, or 5%, from the three-month period ended March 31, 2012, as a result of higher spending. As a percentage of net sales, R&D expenses were 3.1% for the three-month period ended March 31, 2013, compared to 2.7% for the corresponding period in 2012.

Interest and Financing Expenses

Interest and financing expenses for the three-month period ended March 31, 2013 decreased $3.5 million to $5.2 million from the corresponding 2012 period, due mainly to increases in interest capitalized on higher average construction work in progress balances and lower variable-rate borrowings year-over-year.

Other Expenses, Net

Other expenses, net for the three-month period ended March 31, 2013 was $4.2 million versus $0.1 million for the corresponding 2012 period. This change was due primarily to unfavorable currency impacts from the corresponding period in 2012.

Income Tax Expense

The effective income tax rate for the first quarter of 2013 was 24.8% compared to 26.2% for the first quarter of 2012. Our effective income tax rate differs from the U.S. federal statutory income tax rates in the comparative periods mainly due to the impact of earnings from outside the U.S.

Equity in Net Income of Unconsolidated Investments

Equity in net income of unconsolidated investments was $10.3 million for the three-month period ended March 31, 2013 compared to $8.6 million in the same period last year. This increase was due primarily to higher equity income amounts reported from our Catalysts segment joint venture Nippon Ketjen Company Limited, as well as our Polymer Solutions joint venture Magnifin.

Net Income Attributable to Noncontrolling Interests

For the three-month period ended March 31, 2013, net income attributable to noncontrolling interests was $5.5 million compared to $4.4 million in the same period last year. This increase of $1.1 million was due primarily to higher year-over-year profitability from our consolidated joint venture JBC based mainly on higher demand for clear brine fluids.

Net Income Attributable to Albemarle Corporation

Net income attributable to Albemarle Corporation decreased to $84.0 million in the three-month period ended March 31, 2013, from $114.3 million in the three-month period ended March 31, 2012 primarily due to lower pricing, including impacts from both volatility in metals surcharges and related cost impacts in Refinery Catalyst Solutions (particularly rare earths) and in certain products in our overall bromine portfolio, unfavorable overall volume impacts and unfavorable foreign currency impacts. These impacts were partly offset by favorable overall variable input costs, lower overall expenses, lower interest and financing expenses and lower income tax expense.


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Segment Information Overview. We have identified three reportable segments according to the nature and economic characteristics of our products as well as the manner in which the information is used internally by the Company's key decision maker, our Chief Executive Officer, in accordance with current accounting guidance. Our Polymer Solutions segment is comprised of the flame retardants and stabilizers and curatives product areas. Our Catalysts segment is comprised of the Refinery Catalyst Solutions and Performance Catalyst Solutions product areas. Our Fine Chemistry segment is comprised of the Performance Chemicals and Fine Chemistry Services product areas. Segment income represents operating profit (adjusted for significant non-recurring items) and equity in net income of unconsolidated investments and is reduced by net income attributable to noncontrolling interests. Segment data includes intersegment transfers of raw materials at cost and allocations for certain corporate costs.

                                                                                                       Percentage
                                                    Three Months Ended March 31,                         Change
                                                       % of                            % of
                                       2013          net sales         2012          net sales        2013 vs. 2012
                                                           (In thousands, except percentages)
Net sales:
Polymer Solutions                    $ 214,774             33.5 %    $ 228,131             32.1 %                 (6 )%
Catalysts                              235,573             36.7 %      293,522             41.2 %                (20 )%
Fine Chemistry                         191,278             29.8 %      190,051             26.7 %                  1 %

Total net sales                      $ 641,625            100.0 %    $ 711,704            100.0 %                (10 )%

Segment operating profit:
Polymer Solutions                    $  43,670             20.3 %    $  54,547             23.9 %                (20 )%
Catalysts                               49,045             20.8 %       76,641             26.1 %                (36 )%
Fine Chemistry                          36,178             18.9 %       44,363             23.3 %                (18 )%

Total segment operating profit         128,893                         175,551                                   (27 )%

Equity in net income of
unconsolidated investments:
Polymer Solutions                        2,308                           1,845                                    25 %
Catalysts                                7,953                           6,741                                    18 %
Fine Chemistry                              -                               -                                     -  %
Corporate & other                           -                               -                                     -  %

Total equity in net income of
unconsolidated investments              10,261                           8,586                                    20 %

Net (income) loss attributable to
noncontrolling interests:
Polymer Solutions                         (708 )                        (1,002 )                                 (29 )%
Catalysts                                   -                               -                                     -  %
Fine Chemistry                          (4,821 )                        (3,372 )                                  43 %
Corporate & other                           -                                3                                  (100 )%

Total net income attributable to
noncontrolling interests                (5,529 )                        (4,371 )                                  26 %

Segment income:
. . .
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