Business context and reporting period
NewMarket Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. The company primarily manufactures and sells petroleum additives globally, principally through its lubricant and fuel additives businesses. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $563.4 | $599.0 | $1,100.0 | $1,188.2 |
| Gross profit | $170.8 | $145.9 | $323.7 | $302.6 |
| Operating profit | $98.7 | $67.1 | $181.5 | $148.7 |
| Net income | $74.2 | $52.9 | $136.4 | $113.5 |
| Diluted EPS | $6.63 | $4.53 | $12.20 | $9.67 |
| Gross margin | 30.3% | 24.3% | 29.4% | 25.5% |
| Operating margin | 17.5% | 11.2% | 16.5% | 12.5% |
Revenue decreased 5.9% in Q2 and 7.4% in the first half. Petroleum additives segment operating profit rose to $103.0 million from $71.5 million in Q2, and to $190.9 million from $155.7 million in the first half. Segment operating margin was 18.4% for Q2 and 17.5% for the first half, compared with 12.0% and 13.2%, respectively, in 2018.
Cash flow, liquidity and debt
- First-half operating cash flow was $150.6 million, versus $65.8 million in 2018; working capital used $27.1 million. Capital expenditures were $23.2 million.
- Cash was $73.2 million at June 30, 2019, essentially unchanged from year-end. Current assets were $829.4 million and current liabilities $283.5 million; the current ratio was 2.93, versus 3.00 at year-end.
- Long-term debt was $678.8 million, down from $771.0 million at December 31, 2018. The company repaid $87.3 million on its revolver during the first half. The $850 million facility had $766 million unused capacity, net of letters of credit.
- Management reported compliance with debt covenants. Revolver leverage and interest coverage ratios were 1.65 and 10.99, respectively; covenant limits were no more than 3.50 and no less than 3.00.
- Dividends declared were $1.75 per share for Q2 and $3.50 per share for the first half. No share repurchases were reported in the first half of 2019.
Material changes and management commentary
Lower shipments drove the sales decline: petroleum additives shipment volumes fell 8.4% in Q2 and 10.4% in the first half. For the first half, lower lubricant and fuel additives shipments reduced sales by approximately $126.1 million, partially offset by $55.8 million from improved selling prices; foreign currency reduced sales by $19.3 million. The EMEAI region accounted for the largest share of the decline. Management attributed stronger profit and margins mainly to improved pricing, lower raw material costs and favorable conversion costs, partly offset by lower shipments. It also cited lower SG&A and favorable foreign currency translation in segment profit.
Interest and financing expense increased to $15.8 million for the first half from $10.7 million, primarily due to higher average debt and lower capitalized interest, partly offset by favorable interest rates. The first-half effective tax rate fell to 23.2% from 24.8%, primarily reflecting Tax Reform Act provisions. Adoption of lease accounting on January 1, 2019 added approximately $70 million of right-of-use assets and lease liabilities, with no opening retained-earnings adjustment.
Outlook, risks and contingencies
- Management expects 2019 capital spending of $60 million to $70 million and says cash from operations and available revolver capacity should cover operating needs and planned capital expenditures for at least the next twelve months.
- Management expects another year of solid petroleum additives performance and estimates annual market growth of 1% to 2% over the foreseeable future, with a goal of exceeding that rate over the long term. It noted recent evidence that the shipment-demand trend may be starting to reverse, but provided no specific earnings or revenue guidance.
- Risks cited include raw-material availability and price changes, production or distribution disruptions, competition, customer gains or losses, foreign exchange, regulation, substantial indebtedness, cybersecurity, environmental liabilities, pension asset performance, and geopolitical or extraordinary events. Brexit remained a source of regulatory and logistical uncertainty for European operations.
- Environmental remediation, dismantling and decontamination accruals were approximately $11 million at June 30, 2019. Management believes known environmental matters are adequately accrued but says unexpected future costs could materially affect results, financial condition or cash flows. Management believes other legal proceedings are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether shipment volumes and demand recover, particularly in EMEAI, and whether pricing and raw-material costs continue to support margins.
- How much of the improved profitability is sustainable given shipment declines and the lag between pricing actions and margin stabilization.
- Actual 2019 capital expenditures against the $60 million to $70 million expectation and the effect on cash and debt.
- Developments in environmental matters, Brexit-related trade and regulatory conditions, and other risks identified in the filing.
- Debt covenant headroom, liquidity and the company’s plans for excess cash, including dividends, repurchases and investment.