NewMarket Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. NewMarket manufactures and sells petroleum additives worldwide; petroleum additives is its principal business segment. Comparisons are with the corresponding 2019 periods unless stated otherwise.
Financial performance
- Revenue: Q3 net sales were $512.9 million, down 7.7%; nine-month sales were $1.483 billion, down 10.4%. Petroleum additives sales declined 7.3% in Q3 and 10.2% for the nine months. Lower shipment volumes and selling prices were major factors.
- Profit and margins: Q3 operating profit was $98.8 million, up from $88.2 million; net income was $95.8 million versus $67.8 million, and diluted EPS was $8.77 versus $6.06. Nine-month operating profit was $236.2 million versus $269.8 million; net income was $203.7 million versus $204.2 million, and diluted EPS was $18.52 versus $18.26. Petroleum additives operating margin was 20.0% in Q3 versus 17.2%, and 16.9% for the nine months versus 17.4%.
- Cash flow: Nine-month operating cash flow was $216.3 million, compared with $233.2 million. Capital expenditures were $60.1 million. Cash declined $26.7 million from year-end 2019 to $117.7 million.
- Liquidity and debt: Current assets were $854.4 million and current liabilities $308.9 million; the reported current ratio was 2.77. Long-term debt was $608.7 million, down from $642.9 million at December 31, 2019. The company reported a 1.5 leverage ratio, compliance with debt covenants, and $888 million of unused revolving credit capacity.
- Shareholder returns: The company paid $62.7 million in dividends and repurchased $101.4 million of stock during the nine months. Dividends declared were $5.70 per share for the period.
Material changes and management commentary
- Management attributed lower nine-month sales and operating profit primarily to COVID-19 disruption, reduced travel and industrial activity, and lower demand for lubricant and fuel additives. Petroleum additives shipment volume declined 7.5% for the nine months. Q3 shipments increased more than 25% from Q2 as demand improved with reopening and recovering activity.
- Q3 operating profit improved despite lower sales. Management cited lower raw-material costs and improved margins; nine-month operating profit remained pressured by lower shipments and selling prices, higher conversion costs, and unfavorable currency effects.
- Other income included a $16.5 million gain from selling non-operating land in both the Q3 and nine-month 2020 results. This contributed to reported earnings and should be distinguished from operating performance.
- Management said facilities generally continued operating without interruption, raw-material sourcing had not been significantly affected, and the company expected available operating cash and borrowing capacity to cover operating needs and planned capital spending for at least 12 months.
Outlook, risks, and contingencies
- No specific earnings or sales forecast was provided. Management expects petroleum additives performance to remain affected by the economic environment, with recovery dependent on demand and the normalization of restrictions. It expects the market to grow 1%–2% annually over the foreseeable future, with 2020 an exception, and aims to exceed that rate over the long term.
- Expected 2020 capital spending was $75 million–$85 million. Management described continued investment in technology, talent, manufacturing, research and development, and geographic expansion.
- Key disclosed risks include COVID-19 and other extraordinary events, raw-material availability and price changes, facility or distribution disruptions, competition, customer losses, foreign exchange, regulation, indebtedness, pension asset performance, and environmental or legal matters.
- Environmental remediation and related accruals were approximately $10 million at September 30, 2020. The company stated that unexpected future environmental costs could significantly affect financial position, results, or cash flows, although it believed it was adequately accrued for known matters. Management did not expect legal proceedings, individually or collectively, to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth in Q3 reflects the $16.5 million land-sale gain and other non-operating items, versus recurring operating performance.
- Whether the Q3 demand and shipment recovery continued after September 30, particularly given management’s warning that recovery depends on economic conditions and restrictions.
- Whether lower nine-month volumes, selling prices, and higher conversion costs continue to affect petroleum additives margins.
- Actual 2020 capital spending relative to the $75 million–$85 million outlook, and cash available after dividends, repurchases, and investment.
- Future environmental remediation costs and compliance with debt covenants if operating conditions deteriorate.