NewMarket Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 4, 2011. NewMarket’s business is primarily petroleum additives, with smaller real estate development and other operations. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $578.5 | $469.8 | $1,086.6 | $865.0 |
| Gross profit | $147.8 | $132.2 | $288.8 | $252.6 |
| Operating profit | $85.1 | $73.9 | $163.2 | $142.7 |
| Net income | $52.3 | $39.9 | $101.8 | $82.0 |
| Diluted EPS | $3.77 | $2.69 | $7.34 | $5.47 |
- Revenue increased 23% in Q2 and 26% in the first half. Petroleum additives accounted for $572.8 million of Q2 revenue and $1,075.5 million of first-half revenue.
- Calculated gross margin was 25.5% in Q2 versus 28.1% a year earlier, and 26.6% for the first half versus 29.2%. Operating margin was 14.7% versus 15.7% in Q2 and 15.0% versus 16.5% for the first half. Net margin was 9.0% versus 8.5% in Q2 and 9.4% versus 9.5% for the first half.
- Operating cash flow was $38.4 million for the first half, down from $73.2 million. Working-capital changes used $84.7 million of cash, versus $38.9 million in the prior-year period. Capital expenditures were $34.8 million; cash ended the period at $60.9 million.
- At June 30, current assets were $729.3 million and current liabilities $243.3 million; reported working capital was $486.0 million and the current ratio was 3.00. Total debt, including current maturities, was $265.2 million, up $43.3 million from year-end; shareholders’ equity was $562.7 million.
- The company had $48.0 million drawn on its $300 million revolving facility, with $245.6 million available after letters of credit. It reported compliance with debt covenants. Total debt was 32.0% of capitalization, compared with 31.1% at year-end.
Changes versus the prior comparable period
- Petroleum-additives shipments rose 11% in Q2 and 14% in the first half. Management attributed higher sales to increased shipments, selling prices, favorable currency effects, and the full six-month contribution from the Polartech acquisition.
- Higher raw-material costs and increased SG&A and research and development spending partly offset the sales gains. First-half SG&A and R&D together rose approximately $17.3 million, or 17.6%.
- Q2 operating profit in petroleum additives increased to $85.6 million from $76.6 million; first-half segment operating profit was $166.2 million versus $147.0 million.
- Other expense declined year over year, mainly reflecting a smaller loss on the non-hedge-accounted Goldman Sachs interest-rate swap. First-half 2011 other expense also included a $1.0 million charge for consent obtained from senior noteholders.
- Share repurchases reduced outstanding shares: the company repurchased 217,073 shares for $28.2 million in the first half. Cash dividends declared were $1.04 per share for the first half, versus $0.75 a year earlier.
Outlook, risks and contingencies
- Management said first-half demand was strong and expressed confidence in a successful and profitable 2011, but noted early signs of demand softening and said it was too soon to determine the cause. No numerical earnings or revenue guidance was provided.
- Management estimated 2011 capital spending of $55 million to $60 million. It expects operating cash and revolver availability to fund operating needs and capital spending. The company is evaluating acquisitions, principally in petroleum additives, while also considering repurchases and dividends.
- Key disclosed risks include raw-material and transportation availability and costs, supply disruptions, competition, customer gains or losses, foreign-exchange exposure, regulation, environmental liabilities, and acquisition execution and integration.
- Environmental remediation accruals totaled approximately $22.2 million at June 30. Management considers the known liabilities accrued, but cautions that unexpected future costs could materially affect financial results, position, or cash flows. It believes pending legal proceedings are not expected to have a material adverse effect.
- Interest-rate swaps had a reported fair-value liability of $23.2 million; the Goldman Sachs swap was not designated for hedge accounting and its fair-value changes affect earnings. The company had posted $25.6 million cash collateral for that swap. A derivative-related default could be triggered by acceleration of indebtedness following a debt default.
- The filing states that first-half results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the early demand-softening signs persist, and whether pricing continues to offset raw-material cost increases.
- Whether working-capital investment moderates and operating cash flow improves relative to net income.
- Progress on the $55–$60 million capital-spending plan, acquisition priorities, and future capital returns.
- Debt, covenant headroom, and the potential cash or earnings effects of interest-rate swaps and collateral requirements.
- Whether environmental remediation estimates remain adequate as site investigations and regulatory processes develop.