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ALB > SEC Filings for ALB > Form 10-Q on 24-Apr-2014All Recent SEC Filings

Show all filings for ALBEMARLE CORP

Form 10-Q for ALBEMARLE CORP


24-Apr-2014

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, 2013. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading "Financial Condition and Liquidity" on page 27. 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 and 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 impacting 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 the jurisdictional mix of our earnings and changes in tax laws and rates;

• 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, including cyber security breaches, and other innovation risks;

• decisions we may make in the future; 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.


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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 two 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 2014
During the first quarter of 2014:
• We achieved quarterly earnings of $0.71 per share (on a diluted basis), a decrease of 24% from first quarter 2013 results.

• Our net sales for the quarter were $656.7 million, up 2% from net sales of $641.6 million in the first quarter of 2013.

• Cash provided by operating activities was $149.2 million in the first quarter, an increase of 51% from first quarter 2013.

• Our board of directors declared a quarterly dividend of $0.275 per share on February 25, 2014, an increase of 15% from the previous quarterly dividend of $0.24. The dividend was paid on April 1, 2014 to shareholders of record at the close of business as of March 14, 2014.

• We repurchased 623,248 shares of our common stock pursuant to the terms of our share repurchase program and the ASR Program.

• Effective January 1, 2014, we realigned our assets and businesses under two operating segments to better align our resources to support our ongoing business strategy. The Performance Chemicals segment includes Fire Safety Solutions, Specialty Chemicals and Fine Chemistry Services, and the Catalyst Solutions segment includes Refinery Catalyst Solutions, Performance Catalyst Solutions and Antioxidants.

• Initiated reduction of high cost aluminum alkyls supply capacity.

Outlook
The 2013 business environment presented a diverse set of challenges in the markets we serve, from a slow global economic recovery, significant pricing pressure on bromine, and an ever-changing landscape in electronics, to the continuous need for cutting edge catalysts and technology by our refinery partners. Despite these continuing challenges, 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 be ready to respond quickly to the improved market conditions and new business opportunities.
Performance Chemicals: First quarter 2014 revenue for this business is very similar in total to prior year, with very modest volume gains being offset by slippage in average pricing. We continue to manage through an uncertain environment characterized by soft demand in certain products and applications and cautious inventory management by our customers, which could continue to challenge the growth curve of this business throughout 2014. We believe we can sustain healthy margins with continued focus on maximizing our bromine franchise value and continued growth of our Fine Chemistry Services business. We believe that the combination of solid, long-term business fundamentals with our competitive position, product innovations and effective management of raw material inventory inflation will enable us to manage our business through these periods of end market challenges and to capitalize on opportunities that will come with a sustained economic recovery. Our view of third party market indicators and order book trends makes us cautiously optimistic that broad pricing trends for brominated flame retardants have stabilized.
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. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine


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consuming products and markets. We believe the global supply/demand gap will tighten as demand for existing and possible new uses of bromine expand over time. After an exceptional two-year run, clear completion fluids are expected to grow at a healthy rate. Factors that could cause a decline in the trajectory of this business include more stringent inventory management practices by our customers and well completion delays like those we observed late in 2013, or a meaningful decline in oil prices, or increase in regulatory pressure on offshore drilling, which could lead to delays in deep water and ultra-deep water spending. Fine Chemistry Services has a solid pipeline and good growth in contracts linked to electronic materials and agricultural applications, and although we expect the near-term trajectory of growth in this business to be challenging due to the conclusion of several major projects, we expect new projects to offset these losses and establish a foundation for future growth. Our technical expertise, manufacturing capabilities and speed to market allow us to develop a preferred outsourcing position serving leading chemical, agrochemical and life science innovators in diverse industries. We believe we will continue to generate growth in profitable niche products leveraged from this service business.
Catalyst Solutions: First quarter 2014 revenue and segment income are up over prior year on favorable volumes, partly offset by the increase in costs from the capacity we added in these businesses. In 2013 we executed several initiatives that strengthened our competitive position and laid the foundation for greater innovation and organic growth going forward, as we successfully started up a polyolefin catalyst center in South Korea and a world class aluminum alkyls facility in Saudi Arabia within our previously announced joint venture there. These new units, while unlikely to reach high utilization rates for a few years, are state-of-the-art units designed using the best technology and benefiting from our many years of hands-on operating experience. Additionally, we initiated a reduction in high cost supply capacity of certain aluminum alkyls during the first quarter of 2014 that will provide for a more reasonable cost base in that business.
On a longer term basis, we believe increased global demand for petroleum products and implementation of more stringent fuel quality requirements will drive growth in our refinery catalysts business. In addition, we expect growth in our Performance Catalyst Solutions 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.
Delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry, and our technologies continue to provide significant performance and financial benefits to refiners challenged to meet tighter regulations around the world, those managing new contaminants present in North America tight oil, and those in the Middle East and Asia seeking to use heavier feedstock while pushing for higher propylene yields. Based on our technology, current production capacities and end market demand, we remain well-positioned for the future.
Corporate and Other: We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate for 2014 to be approximately 23.9%; 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 2014, we increased our quarterly dividend payout to $0.275 per share. During the three months ended March 31, 2014, we repurchased approximately 0.6 million shares of our common stock with a fair market value of $40.0 million under our existing share repurchase program and the ASR 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.
First Quarter 2014 Compared to First Quarter 2013
Selected Financial Data (Unaudited)
                                                      Three Months Ended                       Percentage
                                                            March 31,                            Change
                                                   2014                  2013                 2014 vs. 2013
                                                 (In thousands, except percentages and per share amounts)
NET SALES                                   $       656,679       $       641,625                        2  %
Cost of goods sold                                  462,393               442,035                        5  %
GROSS PROFIT                                        194,286               199,590                       (3 )%
GROSS PROFIT MARGIN                                    29.6 %                31.1 %
Selling, general and administrative
expenses                                             79,310                64,750                       22  %
Research and development expenses                    22,572                19,953                       13  %
Restructuring and other charges, net                 17,000                     -                        *
OPERATING PROFIT                                     75,404               114,887                      (34 )%
OPERATING PROFIT MARGIN                                11.5 %                17.9 %
Interest and financing expenses                      (8,773 )              (5,231 )                     68  %
Other income (expenses), net                          1,149                (4,209 )                   (127 )%
INCOME BEFORE INCOME TAXES AND EQUITY IN
NET INCOME OF UNCONSOLIDATED INVESTMENTS             67,780               105,447                      (36 )%
Income tax expense                                   12,446                26,192                      (52 )%
Effective tax rate                                     18.4 %                24.8 %
INCOME BEFORE EQUITY IN NET INCOME OF
UNCONSOLIDATED INVESTMENTS                           55,334                79,255                      (30 )%
Equity in net income of unconsolidated
investments (net of tax)                              8,901                10,261                      (13 )%
NET INCOME                                           64,235                89,516                      (28 )%
Net income attributable to noncontrolling
interests                                            (7,652 )              (5,529 )                     38  %
NET INCOME ATTRIBUTABLE TO ALBEMARLE
CORPORATION                                 $        56,583       $        83,987                      (33 )%
PERCENTAGE OF NET SALES                                 8.6 %                13.1 %
Basic earnings per share                    $          0.71       $          0.95                      (25 )%
Diluted earnings per share                  $          0.71       $          0.94                      (24 )%

*Percentage calculation is not meaningful.

Net Sales
For the three-month period ended March 31, 2014, we recorded net sales of $656.7 million, an increase of 2% compared to net sales of $641.6 million for the three-month period ended March 31, 2013. This increase was due primarily to favorable volume impacts of 3%, including impacts of approximately $13.2 million in Catalyst Solutions and $5.7 million in Performance Chemicals, partly offset by unfavorable pricing in Performance Chemicals of approximately $7.9 million. Gross Profit
For the three-month period ended March 31, 2014, our gross profit decreased $5.3 million, or 3%, from the corresponding 2013 period due mainly to higher manufacturing costs of approximately $9.1 million (including $2.9 million of higher pension and OPEB costs allocated to cost of goods sold, substantially all of which resulted from mark-to-market actuarial losses in connection with the curtailment and remeasurement as noted below in Selling, General and Administrative Expenses), overall unfavorable pricing impacts of approximately $5.8 million due to market conditions and approximately $2.0 million higher utilities pricing, partly offset by favorable volume impacts of approximately $11.2 million on market demand across both operating segments. Overall, these factors contributed to a lower gross profit margin for the three-month period ended March 31, 2014 of 29.6%, down from 31.1% for the corresponding period in 2013.


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Selling, General and Administrative Expenses For the three-month period ended March 31, 2014, our selling, general and administrative (SG&A) expenses increased $14.6 million, or 22%, from the three-month period ended March 31, 2013. This increase was primarily due to unfavorable pension and OPEB impacts of $12.2 million (including mark-to-market actuarial losses of $12.5 million) and higher incentive compensation costs and commissions. As a percentage of net sales, SG&A expenses were 12.1% for the three-month period ended March 31, 2014, compared to 10.1% for the corresponding period in 2013.
The mark-to-market actuarial loss in 2014 resulted from a curtailment related to one of our U.S. defined benefit pension plans and our SERP, which triggered a remeasurement of the related assets and obligations during the first quarter. The curtailment was in connection with our workforce reduction plan initiated in the fourth quarter of 2013. The mark-to-market actuarial loss in 2014 is primarily attributable to: (a) a decrease in the weighted average discount rate for our domestic pension plans from 5.14% to 4.97%; and (b) the annualized actual return on the assets of the U.S. defined benefit pension plan subject to the curtailment being approximately (5.0%), significantly lower than the expected return of 7.00%, as a result of overall market and investment portfolio performance. There were no mark-to-market actuarial gains or losses related to our defined benefit pension and OPEB plans recorded during the three month period ended March 31, 2013.
Research and Development Expenses
For the three-month period ended March 31, 2014, our research and development (R&D) expenses increased $2.6 million, or 13%, from the three-month period ended March 31, 2013, as a result of higher spending. As a percentage of net sales, R&D expenses were 3.4% and 3.1% for the three-month periods ended March 31, 2014 and 2013, respectively.
Restructuring and Other Charges, Net
During the first quarter of 2014 we initiated action to reduce high cost supply capacity of certain aluminum alkyl products, primarily through the termination of a third party manufacturing contract. Based on the contract termination, we estimate costs of approximately $14.0 million (recorded in Accrued expenses at March 31, 2014) for contract termination and volume commitments. Additionally, we have recorded an impairment charge of $3.0 million for certain capital project costs also related to aluminum alkyls capacity which we do not expect to recover.
Interest and Financing Expenses
Interest and financing expenses for the three-month period ended March 31, 2014 increased $3.5 million to $8.8 million from the corresponding 2013 period, due mainly to decreases in interest capitalized on lower average construction work in progress balances in the 2014 period. Other Income (Expenses), Net
Other income (expenses), net for the three-month period ended March 31, 2014 was $1.1 million versus $(4.2) million for the corresponding 2013 period. This change was due primarily to favorable currency impacts compared to the corresponding period in 2013 due to better management of currency risks. Income Tax Expense
The effective income tax rate for the first quarter of 2014 was 18.4% compared to 24.8% for the first quarter of 2013. 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. Our effective income tax rate in the 2014 period was also impacted by the pension plan curtailment and related remeasurement, and the restructuring charge related to the aluminum alkyls business.
Equity in Net Income of Unconsolidated Investments Equity in net income of unconsolidated investments was $8.9 million for the three-month period ended March 31, 2014 compared to $10.3 million in the same period last year. This decrease was due primarily to lower equity income amounts reported from our Catalyst Solutions segment joint ventures Nippon Ketjen Company Limited, Eurecat, and Fαbrica Carioca de Catalisadores SA. Net Income Attributable to Noncontrolling Interests For the three-month period ended March 31, 2014, net income attributable to noncontrolling interests was $7.7 million compared to $5.5 million in the same period last year. This increase of $2.2 million was due primarily to the increased profits of our Jordan Bromine Company joint venture. Net Income Attributable to Albemarle Corporation Net income attributable to Albemarle Corporation decreased to $56.6 million in the three-month period ended March 31, 2014, from $84.0 million in the three-month period ended March 31, 2013 primarily due to unfavorable impacts of $15.1 million before taxes related to pension and OPEB items mainly resulting from an actuarial loss in the current period, an $11.1


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million after tax charge related to a reduction of aluminum alkyl supply capacity in the current period, unfavorable pricing of approximately $5.8 million before taxes primarily in Performance Chemicals due to market conditions, and higher manufacturing and SG&A costs of approximately $9.1 million before taxes, partly offset by higher volume impacts of approximately $11.2 million before taxes on market demand. Other Comprehensive Loss
Total other comprehensive loss, net of tax, was $9.5 million for the three-month period ended March 31, 2014 compared to $34.0 million for the corresponding period in 2013. The majority of these amounts are the result of translating our foreign subsidiary financial statements from their local currencies to U.S. Dollars. In the 2014 period, other comprehensive loss, net of tax, from foreign currency translation adjustments was $5.3 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $4.9 million and Korean Won of approximately $2.7 million, partly offset by favorable movements in the Brazilian Real of approximately $3.7 million. Also included in total other comprehensive loss for the 2014 period is an unrealized loss, net of tax, of $4.0 million related to our forward starting interest rate swap. In the 2013 period, other comprehensive loss, net of tax, from foreign currency translation adjustments was $33.9 million, mainly as a result of unfavorable movements in the European Union Euro of approximately $33.4 million and Korean Won of approximately $2.6 million, partly offset by favorable movements in the Brazilian Real of approximately $1.5 million.


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Segment Information Overview. We have identified two 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 chief operating decision maker to evaluate performance and make resource allocation decisions. Our Performance Chemicals segment is comprised of the Fire Safety Solutions, Specialty Chemicals and Fine Chemistry Services product areas. Our Catalyst Solutions segment is comprised of the Refinery Catalyst Solutions, Performance Catalyst Solutions and Antioxidant product areas. Segment income represents segment operating profit 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
                                        2014       net sales       2013       net sales    2014 vs. 2013
                                                      (In thousands, except percentages)
Net sales:
Performance Chemicals                $ 360,543         54.9 %   $ 361,941         56.4 %           -  %
Catalyst Solutions                     296,136         45.1 %     279,684         43.6 %           6  %
Total net sales                      $ 656,679        100.0 %   $ 641,625        100.0 %           2  %
Segment operating profit:
Performance Chemicals                $  75,923         21.1 %   $  82,933         22.9 %          (8 )%
Catalyst Solutions                      51,246         17.3 %      47,175         16.9 %           9  %
Total segment operating profit         127,169                    130,108                         (2 )%
Equity in net income of
unconsolidated investments:
Performance Chemicals                    2,917                      2,308                         26  %
Catalyst Solutions                       5,984                      7,953                        (25 )%
Total equity in net income of
unconsolidated
investments                              8,901                     10,261                        (13 )%
Net income attributable to
noncontrolling interests:
Performance Chemicals                   (7,652 )                   (5,529 )                       38  %
Total net income attributable to
. . .
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