NewMarket Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. NewMarket is principally a global petroleum-additives company; its other activities include real estate development and Ethyl’s TEL and contract-manufacturing businesses.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $2.150 billion | $1.797 billion |
| Gross profit / gross margin | $559.0 million / 26.0% | $515.5 million / 28.7% |
| Operating profit | $340.6 million | $287.3 million |
| Net income | $206.9 million | $177.1 million |
| Diluted EPS | $15.09 | $12.09 |
| Cash from operations | $184.6 million | $164.0 million |
| Capital expenditures | $53.5 million | $36.4 million |
| Cash and cash equivalents at year-end | $50.4 million | $49.2 million |
| Total debt | $243.6 million | $221.9 million |
| Working capital / current ratio | $463.7 million / 3.15 | $396.4 million / 2.92 |
Revenue increased about 20%, driven in petroleum additives by higher prices, 6% higher shipments, product mix, and favorable currency. Petroleum-additives sales were $2.126 billion; segment operating profit was $348.3 million including the settlement gain, or $309.6 million before it. Shell represented 11% of consolidated revenue ($246 million), down from 12% in 2010.
Operating profit included a $38.7 million net gain on the Innospec legal settlement. Excluding that item, operating profit was approximately $301.9 million, compared with $287.3 million in 2010. Higher raw-material costs and increased SG&A and R&D spending partially offset pricing, shipment, and currency benefits. Gross margin fell 2.7 percentage points.
Fourth-quarter 2011 revenue was $505.6 million versus $460.6 million in fourth-quarter 2010; net income was $33.7 million versus $49.4 million. Fourth-quarter gross profit declined to $125.1 million from $126.9 million. The filing attributes a late-year slowdown to softer demand but does not provide a clear quarterly explanation for the net-income decline.
Cash from operations less capital expenditures was approximately $131.1 million. Cash flow funded capital spending, $98.1 million of share repurchases, and $32.6 million of dividends, alongside swap-related payments and other uses. The company repurchased 659,373 shares and declared $2.39 per share in dividends for 2011. About $60 million remained under the repurchase authorization at year-end.
Debt was 30.7% of total capitalization. The company had $22 million drawn on its $300 million revolving facility and $271.9 million of unused capacity after letters of credit. It reported compliance with debt covenants. The 7.125% senior notes mature in 2016; the revolving facility and Foundry Park mortgage mature in 2015, subject to mortgage extension options.
Outlook, risks, and unusual items
- Management expected 2012 to be more profitable than 2011, with increases in volume, revenue, and net income. It expected industry demand growth of approximately 1%–2% and planned to exceed that rate. This is management’s outlook, not quantified EPS guidance.
- Planned 2012 capital expenditures were approximately $60–$70 million; R&D spending was expected to increase again. Management said operating cash and available credit should cover operating needs and planned capital expenditures for at least 12 months.
- The Innospec settlement provided approximately $45 million in cash, shares, and a 1%-interest promissory note: $25 million cash and approximately $5 million in stock were received in 2011; $15 million is payable in three annual $5 million installments beginning September 2012. NewMarket recognized the $38.7 million net gain.
- Following the litigation, the U.S. Department of Justice said it was reviewing certain foreign business activities concerning economic sanctions and anti-corruption compliance, as well as historical domestic-market conduct, and requested information. NewMarket said it intended to cooperate.
- The Goldman Sachs interest-rate swap generated a $17.5 million 2011 loss recognized in earnings; its year-end fair-value liability was $32.1 million. NewMarket had posted $36 million cash collateral. The mortgage-related swap had a separate year-end liability of about $3.7 million.
- Environmental remediation accruals were $21.7 million, plus $0.6 million for dismantling and decommissioning. The company cautioned that unforeseen environmental costs could materially affect results or financial position. It also faced premises-asbestos claims, with an $11 million liability and $7 million of related insurance and other receivables at year-end.
- Key operating risks include raw-material price and supply volatility, single-site production dependencies, chemical-plant hazards, customer and industry concentration, foreign-exchange and geopolitical exposure, regulatory change, and competitive pressure. Pension assets are equity-heavy; U.S. and U.K. plans experienced investment losses in 2011, and management expected substantial 2012 pension contributions.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the $38.7 million settlement gain, and what drove the sharp fourth-quarter net-income decline?
- Whether pricing can continue to offset raw-material inflation and whether gross margins recover from 2011 levels.
- Progress and any potential financial exposure from the DOJ review, environmental matters, and asbestos claims.
- Cash requirements and fair-value changes related to the Goldman Sachs swap, including collateral demands and settlement obligations.
- 2012 demand, volume, revenue, profit, capital-spending, and R&D trends relative to management’s outlook, together with pension funding needs and debt maturities.