NewMarket Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. NewMarket’s business is primarily petroleum additives, including lubricant and fuel additives. The real estate development segment was sold in July 2013 and is reported as discontinued operations.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $589.7 million | $580.5 million | $1,786.5 million | $1,724.0 million |
| Operating profit | $88.0 million | $87.1 million | $282.7 million | $276.6 million |
| Income from continuing operations | $56.9 million | $57.0 million | $181.2 million | $188.3 million |
| Net income | $56.9 million | $78.9 million | $181.2 million | $210.7 million |
| Diluted EPS | $4.53 | $5.94 | $14.20 | $15.81 |
2013 net income and EPS included after-tax proceeds from the real estate sale: a $21.9 million gain in Q3 and $22.4 million of discontinued-operation income for the nine-month period. Continuing-operations EPS rose to $4.53 in Q3 from $4.29, and to $14.20 for nine months from $14.13, despite lower continuing income, reflecting fewer weighted-average shares.
Consolidated gross margin was approximately 28.0% in Q3 versus 28.2% in 2013, and 28.4% for nine months versus 29.1%. Petroleum additives segment operating margin was 16.1% in Q3 versus 16.5%, and 16.9% year to date versus 17.2%. The filing reports a 16.3% rolling-four-quarter segment operating margin.
Segments and period-to-period changes
- Petroleum additives revenue increased 1.4% in Q3 and 3.5% for nine months. Lubricant-additives shipments increased; fuel-additives shipments declined slightly.
- For nine months, petroleum-additives shipments rose approximately 5.4%. Higher lubricant-additives shipments were partly offset by lower selling prices, lower fuel-additives shipments, and raw-material cost pressure. Favorable currency effects supported sales.
- Petroleum-additives segment operating profit was $94.3 million in Q3, down from $95.5 million, and $299.6 million for nine months, up from $295.3 million.
- Q3 operating profit improved modestly while continuing-operations income was nearly flat. For nine months, operating profit increased but continuing income fell, including the effect of a $4.4 million year-to-date loss on the interest-rate swap, compared with a $5.1 million gain in 2013, and higher income-tax expense.
Cash flow, liquidity, and capital
- Cash from operations was $161.7 million for the first nine months, versus $208.4 million in 2013. Higher working-capital requirements reduced 2014 operating cash flow by $58.7 million, primarily from receivables and inventories.
- Capital expenditures were $38.9 million; management estimated full-year 2014 capital spending of $60–$65 million. Investing cash outflow was $43.2 million. Financing cash outflow was $211.9 million, including $209.3 million of repurchases and $42.0 million of dividends, partly offset by borrowings.
- Cash and equivalents were $141.5 million at September 30, down from $238.7 million at year-end; approximately $135.9 million was held by foreign subsidiaries. Management said operating cash flow and available revolver capacity should cover foreseeable operating needs.
- Working capital was $593.6 million and the current ratio was 3.37:1, compared with $649.7 million and 3.62:1 at year-end.
- Long-term debt was $384.5 million: $349.5 million of 4.10% senior notes due 2022 and $35.0 million drawn on the revolving facility. The $650 million facility had $611.7 million unused, including the effect of letters of credit. A Chinese subsidiary also had $7.7 million outstanding on a short-term line of credit.
- Debt was 43.7% of total capitalization, up from 37.9% at year-end. The company reported compliance with debt covenants; its leverage ratio was 1.01 against a maximum of 3.00, and interest coverage was 20.88 against a minimum of 3.00.
- NewMarket repurchased 568,610 shares for $212.0 million in the first nine months. Its 2014 authorization allowed up to $400 million of repurchases through 2016, with approximately $293.2 million remaining at September 30. Dividends declared were $3.30 per share year to date, versus $2.70.
Outlook, risks, and other notable items
- Management expected solid petroleum-additives performance in 2014 and forecast industry shipment-demand growth of 1%–2% annually over the foreseeable future. It aims to outgrow the industry over the long term; no specific earnings or revenue guidance was provided.
- Management expected R&D expense to increase for full-year 2014 compared with 2013. Estimated capital spending included construction of a new Singapore manufacturing facility, expected to open in late 2015 with total investment exceeding $100 million. A 30-year land lease adds approximately $0.7 million in annual operating lease obligations.
- NewMarket cited risks including raw-material and transportation availability, supply interruptions, competition, customer gains or losses, foreign-exchange movements, international operations, regulation, environmental matters, and legal proceedings. It reported no significant change in market-risk disclosures and said disclosure controls were effective.
- The Department of Justice is reviewing certain foreign activities relating to economic sanctions and anti-corruption laws, as well as historical domestic-market conduct. The company is cooperating and conducting an internal review. An EPA TSCA inspection of Afton Chemical and Ethyl began in August 2014; Afton had also initiated a voluntary self-audit.
- Environmental remediation, dismantling, and decontamination accruals totaled approximately $18 million. Management considered known issues adequately accrued but cautioned that unexpected costs could significantly affect financial position, results, or cash flows. Other legal proceedings were not expected by management to have a material adverse effect.
- The interest-rate swap liability was approximately $20.6 million on the balance sheet; the company had posted $25 million of cash collateral. Foreign-currency translation reduced other comprehensive income by $9.4 million year to date.
Investor verification priorities
- Assess whether shipment growth, selling-price reductions, raw-material costs, and currency effects support sustainable revenue and segment margins.
- Track working-capital needs, operating cash conversion, planned capital spending, and the Singapore facility’s cost and timing.
- Review the scale and pace of repurchases and dividends relative to cash balances, debt growth, and foreign cash repatriation constraints.
- Monitor the DOJ review, EPA TSCA inspection, and environmental exposures for developments that could change the company’s stated assessments.
- Verify the effects of swap valuation changes, foreign-exchange movements, and any tax-credit changes on future reported earnings.