NewMarket Corporation — Q1 2017 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. NewMarket’s business is primarily petroleum additives, including lubricant and fuel additives; “All other” includes its tetraethyl lead business and certain contracted manufacturing and services.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $542.8 million | $509.9 million | +6.5% |
| Gross profit | $170.2 million | $175.6 million | -3.0% |
| Operating profit | $93.6 million | $95.4 million | -1.9% |
| Net income | $63.9 million | $61.9 million | +3.2% |
| Diluted EPS | $5.39 | $5.22 | +3.3% |
| Cash dividends declared per share | $1.75 | $1.60 | Higher |
Gross margin was approximately 31.4%, versus 34.4% a year earlier; operating margin was approximately 17.2%, versus 18.7%. Petroleum additives segment sales rose 6.7% to $540.0 million, while segment operating profit fell 1.3% to $99.1 million. Its operating margin was 18.3%, compared with 19.8%.
- Cash flow: Operating cash flow was $34.2 million, down from $74.3 million. Higher working-capital requirements reduced cash by $39.8 million. Capital expenditures were $46.3 million; investing cash outflow was $48.3 million.
- Liquidity: Cash and equivalents were $251.2 million at March 31, up from $192.2 million at year-end. Current assets were $941.9 million and current liabilities $292.6 million; the reported current ratio was 3.22. The $650 million revolving facility had no borrowings and $646.5 million of unused capacity, net of letters of credit.
- Debt: Long-term debt was $601.4 million, up from $507.3 million at December 31. In January, NewMarket issued $250 million of 3.78% senior notes due 2029, principally to repay $156 million drawn on the revolving facility. It also had $350 million principal amount of 4.10% notes due 2022. Debt was 53.1% of total capitalization, versus 51.2% at year-end. The company reported compliance with debt covenants; its leverage and interest coverage ratios were 1.50 and 19.75, respectively, against limits of no more than 3.50 and no less than 3.00.
Material changes and management commentary
Petroleum additives shipment volume increased approximately 13.9%; lubricant and fuel additive shipments both grew. Higher volume drove sales growth, partly offset by lower selling prices and unfavorable foreign-currency effects. Management attributed lower gross profit primarily to unfavorable selling-price and raw-material cost variances, partly offset by volume and conversion-cost benefits. Interest and financing expense rose to $5.6 million from $4.2 million, reflecting higher average debt and interest rates. The effective tax rate declined to 27.5% from 30.4%, helping reduce tax expense despite slightly lower pretax income.
Management expects solid petroleum additives performance in 2017 and estimates long-term industry shipment-demand growth of 1% to 2% annually, with an aim to exceed that rate. Its stated shareholder-return goal is 10% annually over any five-year period, measured by EPS growth plus dividends; it cautions that this may not be achieved every year. Management expects cash from operations and available revolver capacity to cover operating needs and planned capital expenditures for at least the next 12 months.
Capital spending in 2017 is expected to exceed 2016’s $143 million, including the second phase of the Singapore manufacturing facility, expected to be completed in the second half of 2017. NewMarket announced its intent to acquire Aditivos Mexicanos S.A. de C.V.; closing was expected in the first half of 2017, subject to Mexican regulatory review. Management also said it would continue evaluating dividends, repurchases, and other uses of cash.
Risks, contingencies, and other items
- Environmental remediation, dismantling, and decontamination accruals totaled approximately $16 million at March 31, 2017. Management considers the known issues adequately accrued but warns unexpected future costs could significantly affect financial position, results, or cash flows.
- NewMarket faces ongoing environmental and other legal matters, including EPA inspections related to Toxic Substances Control Act compliance. Management does not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- Disclosed risks include raw-material availability and price increases, manufacturing or distribution disruptions, competition, significant customer losses, foreign-exchange movements, regulation, environmental liabilities, and acquisition execution. Cash held by foreign subsidiaries was approximately $175.8 million; repatriation of certain indefinitely reinvested earnings could incur incremental U.S. tax.
- The filing reports no material change in market risk, no material change in internal control over financial reporting, and effective disclosure controls. The quarter’s results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether volume growth and pricing/raw-material trends sustain or improve petroleum additives margins.
- How much planned 2017 capital spending is ultimately incurred, and whether the Singapore expansion delivers expected capacity and returns.
- Status, purchase terms, regulatory approval, and financing implications of the proposed Mexican acquisition.
- Cash-flow conversion and working-capital needs, alongside the increase in debt and future principal repayment obligations.
- Developments in environmental remediation and EPA matters, and any resulting change to accrued liabilities or expected cash costs.