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ALB > SEC Filings for ALB > Form 10-Q on 19-Oct-2012All Recent SEC Filings

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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, 2011. A discussion of consolidated financial condition and sources of additional capital is included under a separate heading "Financial Condition and Liquidity" on page 33.

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.


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.

Third Quarter 2012

During the third quarter of 2012:

• We achieved quarterly earnings of $1.10 per share (on a diluted basis), down 14% from third quarter 2011 results.

• Our net sales for the quarter were $661.2 million, down 9% from net sales of $723.0 million in the third quarter of 2011.

• We announced the expansion of our finished catalysts and components facility in Yeosu, Korea. This expansion will be dedicated to producing Albemarle's PureGrowth™ products, including high purity trimethyl gallium (TMG), triethyl gallium (TEG) and trimethyl aluminum (TMA). Additionally, we announced the grand opening of our new research and operations center at our Yeosu facility during the quarter.

• Our Board of Directors declared a quarterly dividend of $0.20 per share on July 12, 2012, which was paid on October 1, 2012 to shareholders of record at the close of business as of September 14, 2012.

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Uncertainty persists regarding the condition of the global economy and we expect these uncertainties to continue through the remainder of 2012. We continue to monitor the economic indicators that generally forecast demand in the end markets that we serve. Some of these key indicators deteriorated in the third quarter, particularly in the electronics and European construction sectors, and signaled a continued slowing over the second half of 2012 which has adversely impacted our top line performance as well as our profitability as we run our production assets at rates lower than recent levels. Despite these current trends, our business fundamentals are sound and strategically well-positioned as we remain focused on managing costs, increasing sales volumes 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.

Polymer Solutions: We have seen year-over-year volume softness unfavorably impact our net sales and profitability through the first nine months of 2012 versus the corresponding period of 2011, which we believe is attributable to end-market response to continuing global economic challenges. We are closely monitoring customer order patterns and other key indicators in our business during this period, with economic indicators (such as for the electronics and European construction sectors) showing trends that indicate continued slowing for the rest of the year. These trends, should they continue, will likely have adverse impacts on our net sales and profitability for the remainder of 2012 and possibly into 2013, including impacts from running our production assets at rates lower than recent levels.

Despite these current trends and concerns, we believe that the combination of solid business fundamentals with our competitive position, product innovations and effective management of raw material inventory inflation will enable our business to manage through these periods of end-market challenges and to capitalize on opportunities that will come with a sustained economic recovery. Further, we believe our business has been strengthened by our recent exit from the phosphorous flame retardants business and expect this business exit will 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 should 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. Although we have elected to delay the expansion of our flame retardant production capacity at our JBC joint venture in Safi, Jordan based on current bromine balances and end market demand, we remain well-positioned to meet future demand as global economic growth and global bromine supply/demand dynamics warrant the resumption of this expansion.

Catalysts: Lower metals surcharges, mix shifts from HPC to FCC in our Refinery Catalysts division and unfavorable foreign currency effects have resulted in overall lower year-over-year net sales for our Catalysts segment during the first nine months of 2012. The long-running global trends driving fundamental demand for refinery catalysts have remained strong through the end of the third quarter this year. We have seen significant declines in metals surcharges, especially rare earths, relative to levels in the corresponding period of 2011. As a result of these declines, our refinery catalysts business has faced significant headwinds toward achieving net sales performance comparable with 2011, with unfavorable profitability impacts in our FCC refinery catalysts business based on the year-over-year metals surcharges and related cost impacts (mainly rare earths) which we believe will continue through the end of 2012. However, we expect our volumes in refinery catalysts (mainly HPC) and in our Performance Catalysts Solutions division (PCS) to finish strong in the fourth quarter of 2012 and partially offset these headwinds as well as position us for continued growth in 2013.

On a longer term basis, we believe increased global demand for petroleum products, the generally deteriorating quality of crude oil feedstock and implementation of more stringent fuel quality requirements are expected to drive growth in our refinery catalysts 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 penetrations 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. 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, Asia and Brazil, along with our joint ventures, to capitalize on growth opportunities and further develop our leading position in those emerging markets. Our joint venture in Saudi Arabia with SABIC, expected to be operational in late 2012, positions us to lead in the fast-growing Middle East polyolefins market. Construction at our Yeosu, South Korea site is progressing well, where existing assets have allowed us

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to rapidly develop research and small-scale production facilities, adding immediate value to the metallocene polyolefin markets. Intermediate commercial operations at the site began in 2011, with the commercial facility expected to be operational by the first quarter of 2013 to meet regional growth in metallocene polyolefins markets. Additionally, we are finalizing the design package for a future Brazilian hydroprocessing catalysts investment with Petrobras.

Fine Chemistry: In our Fine Chemistry segment, we have seen positive year-over-year net sales and income growth overall during the first nine months of 2012 as a result of volume growth primarily in custom services and in performance chemicals. This segment 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.

In our performance chemicals sector, our completion fluids business showed signs of modest drilling activity during the first nine months of 2012; although drilling rates appear to have improved to date (especially in the U.S. Gulf of Mexico), we continue to monitor these indicators very closely. Additionally, we remain encouraged by long-term regulatory drivers in the U.S. and China for our mercury control business and we are positioned to provide this market and other high growth bromine and derivatives markets with sensible and sustainable solutions.

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. We have commenced an expansion of our bromine and derivatives production capacity (excluding flame retardants) at our JBC joint venture in Safi, Jordan, with commercial completion and start-up of the first two phases of this expansion expected in the first quarter of 2013.

Our fine chemistry services businesses have delivered strong net sales and profitability for the first nine months of 2012, 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 2012 to be 25.3%; however, our rate will vary based on the locales in which income is actually earned. Further, in 2012, we expect our noncash U.S. pension and postretirement expense could exceed 2011 expense amounts by up to $20 million, including approximately $6.5 million in pension settlement charges associated with our supplemental executive retirement plan in connection with the retirement of our former CEO and executive chairman (included in Restructuring and other charges).

In the first quarter of 2012, we increased our quarterly dividend payout to $0.20 per share. During the nine months ended September 30, 2012, we repurchased 680,000 shares of our common stock for approximately $40 million under our existing share repurchase program, and we may periodically repurchase shares in the future on an opportunistic basis.

On October 1, 2012, various amendments to certain of our U.S. pension and defined contribution plans were approved by our Board of Directors. These amendments provide for formula changes to the related defined contribution plans as well as special benefits for certain defined benefit plan participants which culminate in a freeze of pension benefits under the related qualified and nonqualified defined benefit plan after a two year transition period. Using latest available actuarial assumptions, these changes are expected to result in the recognition of a defined benefit pension plan curtailment gain in the fourth quarter of 2012 expected to range between $4 million and $6 million, as well as a one-time employer contribution to the Company's defined contribution plan in the fourth quarter of 2012 (estimated to range between $10 million and $11 million).

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, 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.

Third Quarter 2012 Compared to Third Quarter 2011

Selected Financial Data (Unaudited)

                                                 Three Months Ended                              Percentage
                                                    September 30,                                  Change
                                           2012                      2011                      2012 vs. 2011
                                                (In thousands, except percentages and per share amounts)
NET SALES                             $       661,226           $       722,977                                 (9 )%
Cost of goods sold                            446,469                   464,965                                 (4 )%

GROSS PROFIT                                  214,757                   258,012                                (17 )%
GROSS PROFIT MARGIN                              32.5 %                    35.7 %
Selling, general and
administrative expenses                        59,982                    77,169                                (22 )%
Research and development
expenses                                       19,831                    20,534                                 (3 )%
Restructuring and other charges                 6,508                        -                                   *

OPERATING PROFIT                              128,436                   160,309                                (20 )%
OPERATING PROFIT MARGIN                          19.4 %                    22.2 %
Interest and financing expenses                (7,914 )                  (9,710 )                              (18 )%
Other income, net                               2,370                       956                                148 %

UNCONSOLIDATED INVESTMENTS                    122,892                   151,555                                (19 )%
Income tax expense                             26,591                    38,097                                (30 )%
Effective tax rate                               21.6 %                    25.1 %

INVESTMENTS                                    96,301                   113,458                                (15 )%
Equity in net income of
unconsolidated investments (net
of tax)                                         7,935                     9,500                                (16 )%

NET INCOME                                    104,236                   122,958                                (15 )%
Net income attributable to
noncontrolling interests                       (4,975 )                  (6,860 )                              (27 )%

ALBEMARLE CORPORATION                 $        99,261           $       116,098                                (15 )%

PERCENTAGE OF NET SALES                          15.0 %                    16.1 %

Basic earnings per share              $          1.11           $          1.29                                (14 )%

Diluted earnings per share            $          1.10           $          1.28                                (14 )%

* Percentage calculation is not meaningful.

Net Sales

For the three-month period ended September 30, 2012, we recorded net sales of $661.2 million, a decrease of 9% compared to net sales of $723.0 million for the three-month period ended September 30, 2011. This decrease was due primarily to impacts of lower pricing (mainly from lower metals surcharges year-over-year) and unfavorable impacts of foreign exchange (mainly the weaker Euro) as compared to third quarter 2011, offset in part by overall favorable volumes (despite approximately $8 million in lower net sales resulting from the exit of our phosphorous flame retardants business). Net sales pricing impacts were unfavorable 9% and foreign currency was unfavorable 3%, partly offset by favorable volumes of 3%.

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Gross Profit

For the three-month period ended September 30, 2012, our gross profit decreased $43.3 million, or 17%, from the corresponding 2011 period due mainly to unfavorable impacts from volatility in both metals surcharges and related cost impacts in refinery catalysts (mainly rare earths), other pricing declines, foreign currency and lower fixed cost absorption, partly offset by higher sales volumes and lower variable input costs (including raw materials and energy) and lower manufacturing spending. Our gross profit margin for the three-month period ended September 30, 2012 was 32.5%, down from 35.7% for the corresponding period in 2011.

Selling, General and Administrative Expenses

For the three-month period ended September 30, 2012, our selling, general and administrative (SG&A) expenses decreased $17.2 million, or 22%, from the three-month period ended September 30, 2011. This decrease was primarily due to lower personnel-related costs, including performance based compensation, and favorable impacts of foreign currency. Also, the three-month period ended September 30, 2012 included reductions in our incentive compensation accruals of approximately $6.8 million based on current estimates of related performance achievement measures, as well as favorable adjustments associated with incentive compensation forfeitures from employee departures. As a percentage of net sales, SG&A expenses were 9.1% for the three-month period ended September 30, 2012, compared to 10.7% for the corresponding period in 2011.

Research and Development Expenses

For the three-month period ended September 30, 2012, our research and development (R&D) expenses decreased $0.7 million, or 3%, from the three-month period ended September 30, 2011, due mainly to slightly higher spending offset by favorable impacts of foreign currency. As a percentage of net sales, R&D expenses were 3.0% for the three-month period ended September 30, 2012, compared to 2.8% for the corresponding period in 2011.

Restructuring and Other Charges

During the three-month period ended September 30, 2012, we recorded a settlement charge of $6.5 million associated with our supplemental executive retirement plan in connection with the retirement of our former CEO and executive chairman.

Interest and Financing Expenses

Interest and financing expenses for the three-month period ended September 30, 2012 decreased $1.8 million to $7.9 million from the corresponding 2011 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 Income, Net

Other income, net, for the three-month period ended September 30, 2012 was $2.4 million versus $1.0 million for the corresponding 2011 period. This change was due primarily to year-over-year favorable foreign exchange gains and other miscellaneous items.

Income Tax Expense

The effective income tax rate for the third quarter of 2012 was 21.6% compared to 25.1% for the third quarter of 2011. 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. Also, our effective income tax rate for the 2012 period was impacted by $4.5 million of net tax benefits related principally to the release of various tax reserves for uncertain domestic tax positions due to the expiration of the statute of limitations related to the 2008 tax year.

Equity in Net Income of Unconsolidated Investments

Equity in net income of unconsolidated investments was $7.9 million for the three-month period ended September 30, 2012 compared to $9.5 million in the same period last year. This decrease was due primarily to lower equity income amounts reported from our Catalysts segment joint ventures SOCC (due mainly to start-up operating costs) and Nippon Aluminum Alkyls (NAA), as well as our Polymer Solutions joint venture Magnifin.

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Net Income Attributable to Noncontrolling Interests

For the three-month period ended September 30, 2012, net income attributable to noncontrolling interests was $5.0 million compared to $6.9 million in the same period last year. This decrease of $1.9 million was due primarily to lower year-over-year profitability from our consolidated joint venture Jordan Bromine Company, Limited (JBC).

Net Income Attributable to Albemarle Corporation

Net income attributable to Albemarle Corporation decreased to $99.3 million in the three-month period ended September 30, 2012, from $116.1 million in the three-month period ended September 30, 2011, primarily due to unfavorable impacts from both volatility in metals surcharges and related cost impacts in refinery catalysts (mainly rare earths), net unfavorable foreign currency impacts, restructuring and other charges and lower equity in net income of unconsolidated investments. These impacts were partly offset mainly by favorable volumes, lower manufacturing spending, lower SG&A and R&D expenses, higher other income, net, lower income tax expense and lower net income attributable to noncontrolling interests.

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 . . .

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