NewMarket Corporation — 2017 Form 10-K
Business and reporting period: Fiscal year ended December 31, 2017; fourth-quarter data are unaudited. NewMarket is a specialty chemicals holding company whose principal business is Afton’s global petroleum additives operation; Ethyl conducts contracted manufacturing and North American tetraethyl lead activities. Petroleum additives contributed $2.187 billion of 2017 sales out of $2.198 billion consolidated sales.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2.198 billion | $2.049 billion | Up 7.3% |
| Gross profit | $642.0 million | $680.8 million | Down $38.7 million |
| Operating profit | $336.8 million | $362.7 million | Down 7.1% |
| Net income | $190.5 million | $243.4 million | Down 21.7% |
| Basic and diluted EPS | $16.08 | $20.54 | Down 21.7% |
| Cash from operations | $242.8 million | $353.4 million | Down $110.6 million |
| Capital expenditures | $148.7 million | $142.9 million | Up $5.8 million |
| Long-term debt | $602.9 million | $507.3 million | Up $95.6 million |
- Gross margin was 29.2%, versus 33.2% in 2016. Petroleum additives operating margin fell to 16.5% from 18.9%; management attributed pressure chiefly to higher raw-material costs and selling prices that did not keep pace, as well as conversion costs and product mix.
- 2017 petroleum additives sales increased 7.5%: shipment volume rose 8.2%, partly offset by lower selling prices. Lubricant additives sales were $1.790 billion and fuel additives sales were $397 million.
- Fourth-quarter sales were $560.0 million, versus $501.6 million a year earlier. Gross profit was $146.6 million, versus $149.4 million. Net income fell to $4.1 million from $45.7 million and EPS to $0.35 from $3.86; the filing records a $31 million full-year net tax expense from the 2017 Tax Cuts and Jobs Act, but does not separately quantify its fourth-quarter effect.
- Cash and cash equivalents were $84.2 million at year-end, down from $192.2 million. Working capital was $516.9 million and the current ratio 2.63:1, compared with $542.3 million and 2.84:1 in 2016. The company reported $847.2 million of unused capacity under its $850 million revolving facility.
- Debt comprised $350 million of 4.10% senior notes due 2022, $250 million of 3.78% notes due 2029, and capital leases. No revolving-facility borrowings were outstanding at year-end. Debt was fixed-rate; reported leverage and interest-coverage ratios were 1.52 and 15.49, respectively, within covenant limits.
- Dividends declared were $7.00 per share, up from $6.40. The company repurchased 70,689 shares for approximately $26 million in cash-flow reporting; approximately $419 million remained under the repurchase authorization at year-end.
Material changes and unusual items
- NewMarket acquired approximately 99.5% of Mexican additives company AMSA on July 3, 2017, for $185 million in cash. Preliminary purchase accounting included $118 million of goodwill and $18 million of identifiable intangibles; the acquisition’s operating results were not material to consolidated results.
- The Tax Cuts and Jobs Act generated a provisional $31 million income-tax expense, including $32 million of transition tax on deemed repatriated foreign earnings, partly offset by deferred-tax-liability reductions. The effective tax rate rose to 39.6% from 29.1%. Management expected the new 21% U.S. corporate rate to benefit future net income and cash flows; tax analysis was not complete and adjustments could be recorded through the fourth quarter of 2018.
- Operating cash flow declined partly because of higher working-capital requirements, the tax-reform impact, and $26 million of pension and postretirement contributions. The company funded the AMSA acquisition, capital spending, dividends, and repayment of $156 million drawn on its former revolving facility; it also issued $250 million of 3.78% notes.
- Research and development spending was $140.2 million, down from $157.0 million. Capital expenditures were $148.7 million. Construction and infrastructure investment contributed to higher property, plant and equipment and long-lived assets.
Outlook, risks and contingencies
- Management expected solid petroleum additives performance in 2018 and long-term industry shipment-demand growth of 1%–2% annually, with NewMarket aiming to outgrow the industry. It estimated 2018 capital expenditures at approximately $125 million and R&D spending slightly above 2017 levels.
- Management’s stated shareholder-return goal is a 10% compounded annual return over any five-year period, measured as EPS growth plus dividends; it cautioned that the goal may not be achieved each year. It expects operating cash and available credit to cover operating needs and planned capital expenditures for at least the next 12 months.
- Key exposures include raw-material cost and supply volatility, single-source suppliers and facilities, production or distribution disruptions, competitive pricing and margin pressure, customer and industry concentration, foreign currency and geopolitical risks, cybersecurity, regulation, and pension investment performance. More than 65% of 2017 sales were outside the United States.
- Environmental remediation accruals were approximately $14 million at year-end, compared with $16 million in 2016; 2017 environmental operating and cleanup costs were approximately $26 million. Management considers known matters accrued, but warns unexpected costs could materially affect results, financial position, or cash flows. It also reported asbestos litigation reserves of $10 million and related insurance and other recovery receivables of $5 million.
- The company is a potentially responsible party at several cleanup sites, including Sauget Area 2; its accrued amount for Sauget was not material. Management stated it did not expect pending legal proceedings, including the EPA’s TSCA inspection, to have a material adverse effect, while noting outcomes are uncertain.
Investor verification priorities
- Review the tax-reform charge, transition-tax payment schedule, provisional tax accounting, and the actual effect of the lower tax rate on future earnings and cash flows.
- Track raw-material inflation, pricing recovery, product mix, and whether shipment growth translates into restored operating margins.
- Assess cash conversion, working-capital needs, planned capital expenditures, and the cash contribution and integration benefits of AMSA.
- Monitor debt service, covenant headroom, and liquidity alongside dividends and repurchases.
- Check final AMSA purchase-price allocation and goodwill assumptions, environmental and asbestos exposures, and pension funding needs.