NewMarket Corporation — Q1 2014 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. NewMarket’s main business is petroleum additives, including lubricant and fuel additives; “All other” includes tetraethyl lead and contract manufacturing. The real estate development segment was sold in July 2013 and is presented as discontinued operations.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $576.4 million | $559.8 million |
| Gross profit / margin | $161.9 million / 28.1% | $168.4 million / 30.1% |
| Operating profit | $90.2 million | $96.4 million |
| Continuing-operations income | $57.5 million | $66.9 million |
| Net income | $57.5 million | $67.8 million |
| Diluted EPS | $4.43 | $5.07 |
| Cash from operating activities | $4.4 million | $27.1 million |
| Capital expenditures | $9.3 million | $16.1 million |
Revenue increased 3.0%. Petroleum additives sales rose 2.8% to $574.0 million: lubricant additives revenue increased to $473.3 million, while fuel additives declined to $100.7 million. Product shipments rose approximately 5.9%, but lower selling prices and unfavorable currency effects partly offset volume growth. Petroleum additives operating profit fell to $96.2 million from $102.0 million; its margin was 16.8% versus 18.3%. Consolidated cost of sales was 72.1% of revenue versus 70.0%. The effective tax rate rose to 31.4% from 27.6%. The 2013 net income included $0.9 million from discontinued operations.
Balance sheet, cash, and capital
- At March 31, cash and cash equivalents were $146.7 million, down $92.0 million from year-end; current assets were $853.8 million and current liabilities $231.0 million. Working capital was $622.8 million and the current ratio 3.70.
- Operating cash flow was constrained by a $66.8 million working-capital outflow, principally higher receivables and inventory and lower accrued expenses. Management said cash generation funded operations, including increased working-capital needs.
- Total debt was $355.5 million: $349.5 million of 4.10% senior notes due 2022 and $6.0 million drawn on the $650 million revolving facility, which matures in 2017. Undrawn facility capacity was $640.9 million. The company reported compliance with debt covenants; leverage and interest coverage ratios were 0.98 and 19.79, respectively.
- Q1 cash uses included $77.1 million of share repurchases and $14.2 million of dividends. The company repurchased 232,200 shares at an average $350.95 per share. Shares outstanding fell to 12,867,035 from 13,099,356 at year-end.
- Approximately $143.3 million of cash was held by foreign subsidiaries; a significant portion was asserted to be indefinitely reinvested. Repatriation of those earnings could result in incremental U.S. tax.
Outlook, risks, and notable items
- Management expected good petroleum-additives performance in 2014 and estimated industry shipment demand growth of 1%–2% annually over the next five years. It stated that Q1 results reinforced confidence in its customer-focused strategy, while noting that margins fluctuate quarter to quarter.
- Expected 2014 capital spending was approximately $100 million–$120 million, including a new manufacturing facility in Singapore. Management expected operating cash and available revolving credit to cover operating needs and capital spending.
- Management expected R&D expense to continue increasing in 2014. It described acquisitions in petroleum additives as a priority while also identifying dividends and repurchases as alternative uses of cash.
- The Department of Justice was reviewing certain foreign business activities concerning U.S. sanctions and anti-corruption compliance, as well as certain historical domestic-market conduct. NewMarket was cooperating and conducting an internal review; the filing gives no clear estimate of potential exposure.
- Environmental remediation, dismantling, and decontamination accruals were approximately $17 million. The company considered itself adequately accrued but warned that unexpected costs could significantly affect financial position, results, or cash flows. It also disclosed $11 million of guarantees outstanding and up to $24 million of potential payments under other guarantees not secured by letters of credit.
- A non-designated interest-rate swap generated a $2.2 million Q1 loss in earnings, versus a $0.7 million gain in Q1 2013. Its March 31 fair-value liability was $20.9 million; $26 million of cash collateral was posted.
- After quarter-end, on April 24, the board authorized a new share-repurchase program of up to $400 million through December 31, 2016, and terminated the prior authorization.
Important facts for investors to verify
- Whether shipment growth and regional demand can offset lower selling prices, currency movements, and cost pressures.
- Cash conversion and working-capital trends, especially receivables, inventory, and customer-rebate payments.
- Actual timing and cost of the Singapore facility and the broader 2014 capital-spending plan.
- Any developments, financial consequences, or disclosures arising from the DOJ review and environmental matters.
- Use of cash for buybacks and dividends relative to investment needs, debt levels, and the new repurchase authorization.