NewMarket Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 18, 2020. NewMarket is a holding company whose principal business is Afton Chemical’s global petroleum additives operations. Ethyl also provides contracted services and sells antiknock compounds.
Financial performance and position
- Revenue: $2.190 billion, down 4.3% from $2.290 billion in 2018. Petroleum additives sales were $2.176 billion; lubricant additives contributed $1.778 billion and fuel additives $397 million.
- Profitability: Gross profit was $629.9 million, up from $585.4 million; gross margin rose to 28.8% from 25.6%. Operating profit was $337.3 million, up from $292.7 million. Net income was $254.3 million, up from $234.7 million, and diluted EPS was $22.73 versus $20.34. The effective tax rate increased to 23.3% from 19.1%.
- Cash flow and investment: Operating cash flow was $337.2 million versus $197.9 million. Capital expenditures were $59.4 million versus $74.6 million; operating cash flow less capital expenditures was approximately $277.8 million. Cash and cash equivalents ended the year at $144.4 million, up from $73.0 million.
- Debt and liquidity: Long-term debt was $642.9 million, down from $771.0 million; the company repaid $123.5 million on its revolver. The $850 million revolving facility had $45 million drawn and $803 million unused, including the effect of letters of credit. Working capital was $570.5 million and the current ratio was 2.85, versus $542.1 million and 3.00 in 2018. Debt was 48.5% of debt-plus-equity capitalization, down from 61.1%.
- Shareholder returns: Dividends declared were $7.30 per share, compared with $7.00 in 2018. No shares were repurchased during 2019; the $500 million authorization remained available at year-end.
Material changes versus the prior period
- Petroleum additives sales declined 4.6%; shipment volume fell 5.5%. Lower lubricant and fuel additive shipments and unfavorable currency translation—predominantly the euro—more than offset higher selling prices. North America increased slightly; the other regions declined.
- Despite lower sales, petroleum additives operating profit rose 15.5% to $359.2 million, with segment operating margin improving to 16.5% from 13.6%. Higher selling prices and favorable raw material and conversion costs outweighed the volume decline.
- Operating cash flow increased substantially, helped by lower pension and postretirement contributions ($9.9 million versus $64.8 million in 2018) and working-capital effects. The company used cash to reduce revolver borrowings, pay dividends, and fund investment.
- Fourth-quarter trend: Revenue was $534.4 million versus $538.3 million in Q4 2018; net income was $50.1 million versus $62.8 million, and EPS was $4.48 versus $5.58.
Outlook, risks, and unusual items
- Management expected another year of solid petroleum additives performance in 2020, estimated market growth of 1%–2% annually over the foreseeable future, and aimed to exceed that rate over the long term. Planned 2020 capital expenditures were $75–$85 million. Management stated cash from operations and available credit should cover operating needs and planned capital expenditures for at least 12 months.
- Management’s stated shareholder-return goal is a 10% compounded annual return over any five-year period, measured by EPS growth plus dividend yield; it cautioned that this is not necessarily achieved each year. The company will assess dividends, repurchases, acquisitions, and internal investment as uses of excess cash.
- Key exposures include raw-material cost and availability, single-source suppliers and production sites, transportation or facility disruptions, competition and pricing pressure, concentrated customer industries, foreign exchange and international political/regulatory risks, cybersecurity, and substantial indebtedness. More than 65% of 2019 sales were outside the United States.
- Environmental remediation accruals were approximately $11 million at year-end; environmental operating and cleanup costs were $29 million in 2019, and management expected similar capital spending for environmental and safety projects in 2020. The filing warns unexpected environmental costs could materially affect results or cash flows.
- Premises asbestos liabilities were accrued at $12 million, with $6 million of related insurance and other recovery receivables. The company reported an EPA settlement process concerning alleged Clean Air Act violations at its Sauget, Illinois facility, including a $0.3 million penalty under a negotiated administrative order; final terms were still being negotiated. Management believed pending proceedings would not have a material adverse effect.
- Adoption of the new lease accounting standard in 2019 added approximately $70 million of right-of-use assets and lease liabilities at adoption, without an opening retained-earnings adjustment. Pension obligations are sensitive to discount-rate and investment-return assumptions; the auditor identified pension benefit obligation valuation as a critical audit matter.
- PricewaterhouseCoopers issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
Investor verification priorities
- Confirm whether the 2020 recovery and 1%–2% market-growth assumptions materialized, especially given the 2019 volume decline and regional weakness.
- Track whether pricing and raw-material savings sustain petroleum additives margins, and whether lower volumes or currency movements reverse the improvement.
- Reconcile operating cash generation and planned capital spending with dividends, debt reduction, and any future share repurchases.
- Review debt maturities, revolving-facility availability and covenants, and sensitivity to variable rates and LIBOR-related changes.
- Monitor environmental and asbestos accrual adequacy, the Sauget EPA settlement outcome, and pension funding and actuarial assumptions.
- Assess the impact of foreign operations, customer concentration, supply continuity, and facility or distribution disruptions on future sales and cash flow.