NewMarket Corporation — FY 2012 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. NewMarket’s principal business is global petroleum additives, through Afton Chemical. It also operates a small real estate development business and reports TEL sales and certain contract manufacturing as “All other.”
Financial performance and position
- Revenue: $2.223 billion, up 3.4% from $2.150 billion in 2011. Petroleum additives generated $2.201 billion: lubricant additives $1.750 billion and fuel additives $451 million. International sales represented over 60% of revenue.
- Profit: Gross profit was $637.5 million (28.7% of revenue), versus $559.0 million (26.0%) in 2011. Operating profit was $365.5 million, up from $340.6 million; net income was $239.6 million, up from $206.9 million. Diluted EPS was $17.85, versus $15.09.
- Comparability: 2011 operating profit included a $38.7 million net gain from the Innospec legal settlement. Petroleum additives operating profit before that gain rose to $372.0 million in 2012 from $309.6 million in 2011. The consolidated operating margin was approximately 16.4%, versus 15.8%.
- Fourth quarter: Revenue was $516.2 million and net income was $53.1 million, compared with $505.6 million and $33.7 million, respectively, in fourth-quarter 2011. Fourth-quarter 2012 revenue and net income were below third-quarter 2012 levels.
- Cash flow and investment: Operating cash flow was $272.8 million, versus $184.6 million in 2011; capital expenditures were $38.8 million, versus $53.5 million. Working capital was $518.8 million and the current ratio was 3.39, compared with $463.7 million and 3.15 at year-end 2011.
- Liquidity and debt: Cash was $89.1 million. Total debt increased to $428.8 million from $243.6 million; debt was 51.6% of total capitalization, versus 30.7%. The new $650 million revolving facility had $75 million drawn and $571.9 million unused at year-end. Covenant leverage and interest-coverage ratios were 1.11 and 32.44, respectively; the company reported compliance with covenants.
- Margins and costs: Petroleum additives operating margin was 16.9%, consistent with 2010 and above 2011’s 16.4% (which included the settlement gain). R&D expense rose to $117.8 million from $105.5 million; R&D was 5% of revenue in both years.
Material changes, outlook and risks
- In 2012 NewMarket replaced its $300 million revolver with a five-year $650 million facility, redeemed $150 million of 7.125% notes due 2016, and repaid the $63.5 million Foundry Park mortgage. It issued $350 million of 4.10% senior notes due 2022. The refinancing and repayments produced a $9.9 million early-extinguishment loss.
- The $350 million note proceeds funded the $25-per-share special dividend. Total 2012 dividends were $28 per share, or $375.7 million in cash. The 2012 share-repurchase authorization permits up to $250 million through December 31, 2014; none was used under that authorization in fourth-quarter 2012.
- Management expected improved petroleum additives results in 2013 and projected average annual shipment-demand growth of 1%–2% over the next five years, with an aim to outperform industry growth. It assumed a modest global economic recovery. Higher interest expense from the new notes was expected to offset some business growth.
- 2013 capital expenditures were projected at $80–$100 million, with a similar range expected for each of the following three to five years. This includes investment in a new Singapore facility, expected to begin operating in mid-2015, at an estimated total cost of about $100 million. R&D spending was expected to increase again in 2013.
- Key risks include raw-material cost and supply disruptions, single-site production dependencies, competition and customer concentration, economic and currency exposure, chemical-plant hazards, regulation and environmental liabilities, and pension funding volatility. Shell accounted for 11% of 2012 revenue.
- The Department of Justice was reviewing certain foreign business activities concerning U.S. sanctions and anti-corruption laws, as well as certain historical domestic-market conduct. NewMarket said it was cooperating and conducting an internal review. Environmental remediation accruals were $19.7 million, and management cautioned that unexpected costs could materially affect results or cash flows. The Goldman Sachs interest-rate swap had a $32.8 million fair-value liability and was collateralized by $37.7 million in cash deposits.
Investor verification priorities
- Assess recurring earnings separately from the 2011 Innospec settlement gain and from the 2012 debt-extinguishment charge and swap valuation effects.
- Verify the cash-flow sustainability of the special dividend, higher debt load, planned capital spending, and expected 2013 pension contributions.
- Monitor the DOJ review, environmental remediation estimates and site developments, and the collateral and valuation exposure related to the Goldman Sachs swap.
- Track shipment volumes, pricing and product mix, raw-material pass-through, foreign-exchange effects, and the execution and cost of the Singapore project.