Business Context and Reporting Period
Company: NewMarket Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NewMarket is a leading manufacturer of petroleum additives, primarily lubricant and fuel additives. The company also operates a real estate development segment (Foundry Park I) constructing an office building for MeadWestvaco, and maintains a small "All other" segment including tetraethyl lead (TEL) sales and contract manufacturing.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $417,832 | $440,604 | $1,125,881 | $1,248,836 |
| Gross Profit | $142,967 | $73,578 | $345,454 | $237,374 |
| Operating Profit | $93,747 | $25,631 | $200,865 | $88,047 |
| Net Income | $56,687 | $16,472 | $116,033 | $53,868 |
| Diluted EPS | $3.72 | $1.07 | $7.61 | $3.48 |
| Cash & Equivalents (End of Period) | $133,770 | $33,491 | $133,770 | $33,491 |
| Total Debt (Long-term + Current) | $236,413 | $237,162 | $236,413 | $237,162 |
| Operating Cash Flow (9 Months) | N/A | N/A | $194,617 | $11,563 |
Margins (9 Months 2009): Gross Margin was 30.7%; Operating Margin was 17.8%.
Material Changes vs. Prior Period
- Profitability Surge: Net income for the nine months ended September 30, 2009, more than doubled to $116.0 million from $53.9 million in the prior year period. Operating profit increased by 128% to $200.9 million.
- Revenue Decline: Consolidated net sales decreased 10% year-over-year for the nine-month period, driven by a 16% reduction in product shipments due to the global economic slowdown and customer destocking. Foreign currency impacts reduced sales by approximately $33.3 million.
- Margin Expansion: Despite lower sales volumes, operating margins expanded significantly (from 7.9% to 19.2% for the nine-month period) due to lower raw material costs and favorable pricing actions taken in 2008.
- Liquidity Improvement: Cash and cash equivalents increased by $112.0 million to $133.8 million, fueled by strong operating cash flows ($194.6 million) and the repayment of $41.9 million on the revolving credit facility.
- Unusual Items: Other expense, net, included a $15.7 million unrealized loss on a new interest rate swap entered into in June 2009. The prior year period included a $3.2 million gain from a legal settlement.
Guidance, Outlook, and Risks
- Outlook: Management believes the contraction in demand has ended and shipments are returning to historical levels. Raw material costs are increasing, and availability is tightening. The company expects to continue investing in R&D and health/environmental compliance.
- Capital Projects: The Foundry Park I office building construction is on track for completion in late 2009. The company is actively seeking permanent financing to replace the construction loan maturing in August 2010.
- Expansion: A new manufacturing facility in Singapore is planned to begin production in the first half of 2010 to improve supply chain security in the region.
- Shareholder Returns: The company intends to leverage its strong cash position for growth, potential acquisitions in the petroleum additives sector, and dividends. A quarterly dividend of $0.375 per share was declared on October 22, 2009.
- Risks:
- Financing Risk: Uncertainty regarding the terms of permanent financing for the Foundry Park I project upon the maturity of the construction loan.
- Derivative Risk: Exposure to the Goldman Sachs interest rate swap; a 50 basis point adverse shift in LIBOR could increase the liability by approximately $5 million.
- Environmental Liabilities: Total accruals for environmental remediation were $22.3 million. While management believes these are adequate, unexpected future costs could impact financial results.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the $15.7 million unrealized loss on the Goldman Sachs interest rate swap and the company's hedging strategy for the Foundry Park I project.
- Financing Status: Confirm the status of permanent financing negotiations for the Foundry Park I construction loan maturing in August 2010.
- Raw Material Costs: Monitor trends in raw material costs and availability, as rising costs could compress the expanded margins achieved in 2009.
- Environmental Accruals: Review the $22.3 million environmental remediation accruals and any updates on the Sauget Area 2 Site and other Superfund liabilities.
- Foreign Currency Impact: Assess the sensitivity of future earnings to foreign exchange rate fluctuations, which negatively impacted sales by $33.3 million in the first nine months of 2009.