NewMarket Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise. NewMarket’s principal business is petroleum additives. Financial amounts below are in U.S. dollars; “$m” means millions.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $562.7m | $508.1m |
| Gross profit / margin | $169.5m / 30.1% | $141.0m / 27.7% |
| Operating profit / margin | $104.7m / 18.6% | $78.1m / 15.4% |
| Net income | $66.5m | $49.6m |
| Diluted EPS | $4.96 | $3.57 |
| Operating cash flow | $63.1m | $16.2m |
| Capital expenditures | $7.4m | $24.2m |
| Cash and cash equivalents | $72.7m | $50.4m at Dec. 31, 2011 |
| Total debt, including current maturities | $220.6m | $243.6m at Dec. 31, 2011 |
| Working capital / current ratio | $504.0m / 3.09 | $463.7m / 3.15 at Dec. 31, 2011 |
Petroleum additives revenue was $557.7m, up 10.9%, and segment operating profit was $107.2m versus $80.6m. The segment’s operating margin rose to 19.2% from 16.0%. Real estate development revenue and operating profit were broadly unchanged at $2.9m and $1.8m, respectively. The filing reports dividends declared of $0.75 per share, up from $0.44.
Material changes and management commentary
- Consolidated revenue increased 10.7%. Petroleum additives selling prices contributed $61.4m to the year-over-year increase; lower shipments and product-mix changes reduced revenue by $4.4m, and foreign currency reduced it by $2.0m. Total shipments declined 1% year over year, while management said demand had rebounded from Q4 2011.
- Management attributed stronger petroleum additives profit primarily to higher selling prices, partly offset by higher raw-material costs. It said costs had eased from Q4 2011 but were increasing, and expected recovery of higher costs through pricing to lag. SG&A declined about 5.5%; research, development and testing costs increased about 14%.
- Operating cash flow improved year over year despite a $22.9m working-capital use, reflecting higher receivables and lower accrued expenses, partly offset by higher payables and income taxes payable. Cash increased by $22.4m during the quarter.
- In March, the company replaced its $300m revolving facility with a five-year, unsecured $650m multicurrency facility, maturing March 14, 2017. At quarter-end, borrowings were zero and reported unused capacity was $643.9m, after $6.1m of letters of credit. The facility permits a conditional additional $150m in commitments or term loans.
- After quarter-end, NewMarket redeemed all $150m of its 7.125% senior notes on April 16, using revolving-facility borrowings. Management intended to repay the $62.8m Foundry Park I mortgage in early May, also using the facility. These subsequent actions were not reflected in quarter-end debt balances.
Outlook, risks and unusual items
- Management expected 2012 to be more profitable than 2011, with increases in volume, revenue and net income, but cautioned that it did not expect every 2012 quarter to match Q1 profitability. It forecast industry demand growth of 1%–2% and planned to seek growth in underrepresented markets. Estimated 2012 capital spending was approximately $50m. No specific full-year revenue or earnings amounts were provided.
- Q1 included a $3.2m loss on early extinguishment of debt. Management expected a further $6.7m in Q2 and described the total expected loss as approximately $9.9m, of which about $5.4m would be a Q2 cash payment; the remainder would be noncash.
- The company disclosed a Department of Justice review of certain foreign business activities relating to U.S. economic sanctions and anti-corruption laws, as well as certain historical domestic conduct. It is cooperating and conducting an internal review; the filing does not quantify a potential exposure.
- Environmental remediation accruals were approximately $21.6m at March 31, 2012, plus $0.6m for dismantling and decommissioning. Management considered known exposures accrued, but warned that unexpected future costs could materially affect financial position, results or cash flows. It did not expect pending legal proceedings, individually or collectively, to have a material adverse effect.
- Interest-rate swaps had a reported fair-value liability of $31.4m. The company had posted $32.8m cash collateral related to the Goldman Sachs swap; it also disclosed a $31.0m net liability termination value for derivatives subject to credit-risk-related contingent features. The planned mortgage payoff was expected to terminate its associated swap.
- Other stated risks include raw-material and transportation availability, supply interruptions, competition, customer concentration, foreign currency and international operations, regulation, environmental liabilities, and execution or integration of acquisitions. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether pricing gains and improved margins persist as raw-material costs rise, and whether the company can recover those costs without weakening demand or shipment levels.
- Completion and financing effects of the senior-note redemption and planned mortgage repayment, including resulting debt, interest expense, swap termination and total debt-extinguishment charges.
- Progress and any financial consequences of the DOJ review, internal investigation, environmental matters and other contingencies.
- Cash-flow and liquidity trends, including working-capital needs, foreign cash balances and potential U.S. tax if indefinitely reinvested foreign earnings are repatriated.
- Delivery against management’s qualitative 2012 growth outlook and approximately $50m capital-spending estimate; the filing states that Q1 results may not represent full-year performance.