NewMarket Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. NewMarket is principally a specialty chemicals company; its main business is global lubricant and fuel additives, conducted primarily through Afton Chemical. Ethyl includes North American tetraethyl lead sales and contract manufacturing.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $2.280 billion | $2.212 billion |
| Gross profit / gross margin | $653.3 million / 28.6% | $630.5 million / 28.5% |
| Operating profit | $351.8 million | $358.4 million |
| Income from continuing operations | $242.3 million | $237.3 million |
| Net income / diluted EPS | $264.7 million / $19.90 | $239.6 million / $17.85 |
| Operating cash flow | $277.9 million | $272.8 million |
| Capital expenditures | $58.5 million | $38.8 million |
| Cash at year-end | $238.7 million | $89.1 million |
| Long-term debt | $349.5 million | $424.4 million |
| Working capital / current ratio | $649.7 million / 3.62 | $518.8 million / 3.39 |
FY 2013 net income included a $21.9 million after-tax gain on the sale of the real estate development business; continuing-operations income was $242.3 million. The company reported a 29.0% effective tax rate, versus 29.7% in 2012. Petroleum additives operating profit was $375.3 million, up from $372.0 million; its operating margin was 16.5%, compared with 16.9%.
Fourth-quarter 2013 revenue was $556.4 million, gross profit $151.6 million, income from continuing operations $54.0 million, and net income $54.0 million. The corresponding fourth-quarter 2012 figures were $513.3 million, $138.9 million, $52.2 million, and $53.1 million.
At year-end, no borrowings were outstanding under the $650 million revolving facility; $647 million was unused after letters of credit. The company reported leverage and interest coverage ratios of 0.94 and 19.54, respectively, and compliance with debt covenants. The $349 million senior notes bear 4.10% interest and are due in 2022; a Chinese subsidiary also had $3 million outstanding on a short-term line due in 2014.
Changes versus prior year
- Revenue rose 3.1%. Petroleum additives revenue increased 3.2%, led by lubricant additives; fuel additives revenue declined. Product shipments rose 3.7%, while lower selling prices and unfavorable currency effects partly offset volume growth.
- Operating profit decreased 1.8%, despite higher gross profit, as research and development and selling, general, and administrative expenses increased. R&D spending rose to $136.6 million from $117.8 million.
- Net income increased 10.5%, with the 2013 real estate sale gain contributing materially. Continuing-operations income increased about 2.1%.
- Operating cash flow was broadly stable. Cash rose by $149.6 million, supported in part by $140.0 million of net cash proceeds from the real estate sale and return of swap deposits. The company repaid $75 million of revolving-credit borrowings and repurchased 327,600 shares for approximately $96 million in total recorded cost.
- The real estate development segment was sold in July 2013 and is reported as discontinued operations. Prior periods were reclassified accordingly.
Outlook, commentary, and risks
- Management expected solid petroleum additives results in 2014 and estimated industry shipment demand growth of 1%–2% annually over the next five years. It did not provide specific earnings or revenue guidance.
- Planned 2014 capital expenditures were approximately $120 million, including the start of a Singapore manufacturing facility, expected to begin operations in late 2015. Total Singapore investment was expected to exceed $100 million. Forecast capital expenditures for 2015–2016 were $70 million–$90 million per year.
- Management said R&D expenses were expected to increase again in 2014. The company continued to consider acquisitions, particularly in petroleum additives, and also cited repurchases and dividends as potential uses of cash.
- The U.S. Department of Justice was reviewing certain foreign business activities relating to economic sanctions and anti-corruption compliance, as well as historical domestic-market conduct. NewMarket said it was cooperating and conducting an internal review; the filing does not provide a clear estimate of potential exposure or timing.
- Environmental remediation, dismantling, and decontamination accruals were approximately $18 million at year-end. Management considered known matters accrued, but warned that unexpected costs could materially affect financial results or cash flows. The company is a potentially responsible party at multiple sites and identified asbestos claims, with a $12 million liability and $6 million expected insurance and other recoveries.
- Other principal risks include raw-material price and availability volatility, reliance on a small number of major customers (Shell represented 11% of revenue), production concentration at certain facilities, competition, foreign exchange and geopolitical exposure, chemical-process hazards, regulatory compliance, and pension funding volatility.
- A Goldman Sachs interest-rate swap remained a notable unusual exposure: its year-end fair-value liability was $21.2 million, with $25.8 million of collateral deposits. Changes in fair value are recorded immediately in earnings; a 50-basis-point adverse LIBOR shift would have increased the liability by an estimated $4 million.
Important facts for investors to verify
- Separate recurring operating performance from the after-tax real estate disposal gain when assessing 2013 net income and EPS.
- Track volume, pricing, product mix, raw-material costs, and currency effects, especially in lubricant versus fuel additives.
- Monitor the DOJ review and any subsequent disclosure of findings, costs, or contingencies.
- Assess execution, cost, and demand assumptions for the Singapore facility and the planned increase in capital spending.
- Review updates to environmental and asbestos liabilities, swap valuation and collateral, and pension funding assumptions.
- Confirm ongoing covenant compliance, debt repayment plans, and the use of cash for investment, dividends, and share repurchases.