NewMarket Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparison is with Q1 2015 unless otherwise stated. NewMarket’s principal business is petroleum additives, comprising lubricant and fuel additives. “All other” includes the tetraethyl lead business and certain contracted manufacturing and services.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $509.9 million | $559.6 million | Down 8.9% |
| Gross profit | $175.6 million | $181.3 million | Down $5.7 million |
| Operating profit | $95.4 million | $99.8 million | Down 4.4% |
| Net income | $61.9 million | $63.9 million | Down 3.2% |
| Diluted EPS | $5.22 | $5.14 | Up 1.6% |
| Operating cash flow | $74.3 million | $56.6 million | Up $17.7 million |
Consolidated operating margin was approximately 18.7%, versus 17.8%; net margin was approximately 12.1%, versus 11.4%. Petroleum additives revenue was $506.1 million, down 8.8%, and segment operating profit was $100.4 million, down $4.6 million. Petroleum additives segment operating margin increased to 19.8% from 18.9%. The filing attributes lower sales chiefly to lower selling prices, with unfavorable foreign exchange and lower shipments also contributing. Worldwide petroleum additives shipments declined about 3.4%. Lower raw-material costs substantially offset the unfavorable selling-price effect on profit.
Reported cost of goods sold was $334.4 million, or 65.5% of sales, compared with $378.3 million, or 67.8%. SG&A was $40.9 million; R&D was $39.2 million. Interest and financing expense was $4.2 million. The effective tax rate was 30.4%, compared with 31.7%. The filing’s MD&A separately describes the gross-profit decline as $3.9 million, which does not match the income-statement figures; verify this discrepancy.
Cash, liquidity, and debt
Cash and cash equivalents were $122.3 million at March 31, up $28.8 million since year-end; approximately $119.2 million was held by foreign subsidiaries. Operating cash flow was $74.3 million, capital expenditures were $28.4 million, and cash used in investing activities was $32.1 million. Financing activities used $12.8 million, including $35.8 million of share repurchases and $19.0 million of dividends paid. Declared dividends were $1.60 per share, versus $1.40.
Total current assets were $773.8 million and current liabilities were $240.1 million; the current ratio was 3.22. Working capital was $533.7 million. Long-term debt was $541.1 million, up from $490.9 million at year-end, including $190.0 million drawn on the revolving facility, $346.1 million carrying value of 4.10% senior notes due 2022, and a $5.1 million capital lease obligation. The $650 million revolving facility had $456.3 million unused, net of borrowings and letters of credit. The company reported compliance with debt covenants; leverage and interest coverage ratios were 1.40 and 23.34, respectively.
Outlook, risks, and notable items
- Management expects solid petroleum-additives performance in 2016 and estimates long-term industry shipment-demand growth of 1%–2% annually; it aims to outperform that rate. No specific 2016 earnings or revenue forecast is provided.
- Management expects 2016 capital spending to exceed 2015’s $126 million, including the Singapore manufacturing facility and global manufacturing and R&D infrastructure. It expects cash from operations and available revolving-credit borrowings to cover operating needs and planned capital spending for at least 12 months.
- Management’s stated shareholder-return goal is 10% annually over any five-year period, measured by EPS growth plus dividends, while noting that the goal may not be achieved each year. The company will continue to evaluate dividends, repurchases, investment, and acquisitions.
- Risks cited include raw-material availability and price changes, manufacturing or distribution disruptions, competition, customer losses, foreign-exchange fluctuations, overseas operations, regulatory and environmental matters, and legal proceedings.
- Environmental remediation accruals were approximately $17 million. The company also disclosed an ongoing DOJ review concerning certain foreign business activities and historical domestic-market conduct; it reported no indication the DOJ intended action and made no provision. EPA TSCA inspections and a company self-audit were also ongoing; management did not expect material effects.
- An interest-rate swap liability was $23.1 million; its fair-value loss recognized in Q1 was $3.9 million. Cash collateral posted was $27.3 million. Foreign cash includes amounts treated as indefinitely reinvested; repatriation of those earnings could create incremental U.S. tax.
Most important facts for investors to verify
- Whether lower selling prices, foreign exchange, and shipment trends persist, and whether lower raw-material costs continue to offset price pressure.
- The gross-profit decline: the income statement implies $5.7 million, while MD&A states $3.9 million.
- Singapore project spending, capital-expenditure progress, and the effect of higher borrowings and capital returns on leverage and liquidity.
- Developments in the DOJ review, TSCA matters, environmental remediation, and the interest-rate swap exposure.
- The availability and potential tax cost of foreign-held cash, and whether management’s long-term demand and shareholder-return goals remain achievable.