NewMarket Corporation — Q3 2019 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2019, compared with the same 2018 periods. NewMarket primarily manufactures and sells petroleum additives; its principal segment is petroleum additives.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $555.8m | $563.2m | $1,655.9m | $1,751.4m |
| Gross profit | $162.7m | $140.9m | $486.4m | $443.5m |
| Operating profit | $88.2m | $68.1m | $269.8m | $216.9m |
| Net income | $67.8m | $58.5m | $204.2m | $171.9m |
| Diluted EPS | $6.06 | $5.12 | $18.26 | $14.78 |
| Gross margin | 29.3% | 25.0% | 29.4% | 25.3% |
| Operating margin | 15.9% | 12.1% | 16.3% | 12.4% |
For the first nine months, operating cash flow was $233.2m, versus $101.1m a year earlier; capital expenditures were $37.1m versus $55.1m. Working capital used $36.0m of cash. Cash at September 30 was $80.0m, up from $73.0m at year-end 2018. The current ratio was 2.95, compared with 3.00 at year-end.
Long-term debt was $640.0m, down from $771.0m at December 31, 2018, primarily reflecting $126.3m of net revolving-credit-facility repayments. The $850m facility had $805m available, including the effect of letters of credit. The company reported compliance with debt covenants; leverage and interest coverage ratios were 1.5 and 11.87, respectively. Dividends declared were $1.90 per share for Q3 and $5.40 year to date. No shares were repurchased in the first nine months of 2019.
Material changes and management commentary
- Consolidated sales fell 1.3% in Q3 and 5.5% year to date. Petroleum-additives sales declined 1.8% and 5.7%, respectively. Year-to-date petroleum-additives shipments fell 7.6%; higher selling prices partly offset lower shipments and unfavorable currency effects.
- Petroleum-additives operating profit rose 25.0% in Q3 to $94.8m and 23.4% year to date to $285.6m. Segment operating margin improved to 17.2% in Q3 from 13.5%, and to 17.4% year to date from 13.3%. Management attributed improvement principally to higher selling prices and lower raw-material costs, partly offset by lower shipments.
- Year-to-date interest expense increased to $22.7m from $18.5m, while Q3 interest expense declined to $7.0m from $7.8m. The nine-month effective tax rate increased to 22.9% from 21.6%; Q3 rate was 22.5% versus 14.4%, primarily reflecting Tax Reform Act provisions.
- Adoption of the new lease standard on January 1, 2019 added about $70m of right-of-use assets and lease liabilities. At September 30, operating lease liabilities were $58.2m and finance lease liabilities $13.5m. The filing also reports about $40m of commitments for leases not yet commenced.
Outlook, risks and contingencies
Management expected another year of solid petroleum-additives performance in 2019 and estimated annual market growth of 1%–2% for the foreseeable future, with a long-term aim to outgrow the market. Planned 2019 capital spending was $60m–$70m. Management said operating cash and available revolving-credit borrowings should cover operating needs and planned capital expenditures for at least the next 12 months. Its stated shareholder-return goal is a 10% compounded annual return over any five-year period, defined as EPS growth plus dividends; this is a goal, not a guarantee.
Risks cited include raw-material availability and price volatility, supply or facility disruptions, competition, customer gains or losses, foreign-exchange movements, international operating risks, substantial indebtedness, pension-asset underperformance, cybersecurity, and legal or environmental matters. Brexit remained uncertain, with potential regulatory and logistical challenges. Environmental remediation accruals were about $11m; the company cautioned that unexpected future costs could materially affect results, financial condition or cash flows. Management did not expect legal proceedings, individually or collectively, to have a material adverse effect. No material market-risk changes were reported.
Important facts for investors to verify
- Whether shipment trends and improved pricing and raw-material costs persist, particularly given the year-to-date sales decline and currency headwinds.
- Whether the expected 2019 capital-spending range and solid-performance outlook were achieved; nine-month results are not necessarily indicative of full-year results.
- Debt repayment, facility availability and covenant headroom, alongside the company’s dividend and other capital-allocation decisions.
- Potential cash-flow or earnings effects from environmental liabilities, Brexit, foreign exchange, pension contributions and lease commitments.