NewMarket Corporation — Q3 2015 Form 10-Q
Business and period: NewMarket’s business is primarily petroleum additives, including lubricant and fuel additives. This filing covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $540.9 | $589.7 | $1,661.2 | $1,786.5 |
| Gross profit | $174.8 | $165.2 | $525.8 | $507.9 |
| Operating profit | $97.6 | $88.0 | $286.3 | $282.7 |
| Net income | $62.0 | $56.9 | $184.7 | $181.2 |
| Diluted EPS | $5.08 | $4.53 | $14.94 | $14.20 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $188.3 | $161.7 |
- Revenue declined 8.3% in Q3 and 7.0% year to date. Gross margin rose to approximately 32.3% from 28.0% in Q3 and to 31.6% from 28.4% for nine months. Operating margin was approximately 18.0% versus 14.9% in Q3 and 17.2% versus 15.8% year to date.
- Lower raw-material costs were the principal driver of higher gross profit, more than offsetting unfavorable selling-price effects. Research and development expense increased 8.5% in Q3 and 14.8% year to date, primarily supporting lubricant additives.
- Cash and equivalents were $110.3 at September 30, 2015, versus $103.0 at year-end 2014. Nine-month capital expenditures were $84.2. Working-capital changes used $27.9 of operating cash.
- Long-term debt was $507.6, up from $363.5 at year-end; cash less debt was approximately negative $397.2. Debt comprised $350 million of 4.10% senior notes due 2022 and $158.0 drawn on the revolving facility. The facility had $489.2 of unused capacity. The company reported compliance with debt covenants.
- Current assets were $804.0 and current liabilities $257.8; the reported current ratio was 3.12. Dividends declared were $1.40 per share in Q3 and $4.20 year to date. The company repurchased 456,483 shares for $180.6 during the first nine months.
Changes, outlook, and risks
- Lower revenue reflected selling-price and foreign-currency impacts. For the nine-month petroleum-additives comparison, management attributed approximately $73.5 of the sales decline to currency and $47.8 to selling prices and customer mix; shipments were substantially unchanged overall. The strong U.S. dollar was a significant headwind.
- Management expected solid petroleum-additives performance for 2015 and cited long-term industry shipment-demand growth of 1%–2% annually. Planned 2015 capital spending was approximately $100–$140, including the Singapore facility. Phase One was expected to be completed in late 2015, with commercial production in early 2016; Phase Two was scheduled for 2017. The filing gives no specific earnings or revenue forecast.
- Management said operating cash generation and available revolver borrowings should cover operating needs for at least the next 12 months. It cited acquisition opportunities in petroleum additives, while also considering dividends and repurchases as uses of excess cash.
- On October 21, 2015, after quarter-end, the board approved a new share-repurchase authorization of up to $500 million through December 31, 2018, and terminated the prior program.
- The company recorded a $3.5 loss on its interest-rate swap in Q3, recognized through earnings without hedge accounting. Environmental remediation accruals were approximately $18. The filing describes routine legal and environmental matters, an EPA TSCA inspection and company self-audit, and a Department of Justice review of certain foreign-business activities involving sanctions and anti-corruption compliance and historical domestic conduct. Management said it did not expect identified legal matters to have a material adverse effect, but outcomes remain uncertain.
- Other stated risks include raw-material availability and price changes, facility disruptions, competition, significant-customer changes, foreign-exchange movements, regulation, environmental liabilities, and geopolitical or other extraordinary events.
Important facts for investors to verify
- Whether lower selling prices and currency effects, and the benefit from lower raw-material costs, persist or reverse.
- Execution, timing, cost, and expected returns of the Singapore facility and other planned capital investments.
- Use of the expanded repurchase authorization, dividend levels, and the effect of buybacks and borrowing on leverage and liquidity.
- Developments in the Department of Justice review, EPA TSCA matters, and environmental remediation exposures relative to recorded accruals.
- Foreign-cash availability and any tax consequences if earnings described as indefinitely reinvested are repatriated.