NewMarket Corporation — Q1 2020 Form 10-Q
Business context and period. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019. NewMarket’s business is primarily the manufacture and sale of petroleum additives, including lubricant and fuel additives, to customers worldwide.
Financial performance and position
- Revenue: Net sales were $559.4 million, up 4.3% from $536.6 million. Petroleum additives sales rose 4.6% to $557.4 million; lubricant additives increased, while fuel additives were slightly lower. Shipment growth contributed $29.6 million, partly offset by $3.2 million of unfavorable currency impact and $1.7 million from lower selling prices.
- Profit and margins: Gross profit was $180.9 million, up from $152.9 million; gross margin was approximately 32.3% versus 28.5%. Operating profit increased to $109.7 million from $82.9 million; operating margin was approximately 19.6% versus 15.4%. Net income was $85.5 million versus $62.2 million, and diluted EPS was $7.67 versus $5.57. The effective tax rate was 22.3%, compared with 23.0%.
- Segment performance: Petroleum additives operating profit increased 29.4% to $113.7 million, with a 20.4% segment operating margin versus 16.5%. Management attributed the improvement principally to higher shipments and lower conversion costs; lower raw-material costs were offset by decreased selling prices.
- Cash flow: Operating cash flow was $64.5 million, compared with $19.1 million. Working capital used $42.1 million, primarily reflecting higher receivables and accrued expenses. Capital expenditures were $20.1 million. Dividends paid were $21.2 million and share repurchases were $79.5 million.
- Liquidity and debt: Cash was $178.7 million at quarter-end, up $34.3 million from year-end. Current assets were $930.9 million and current liabilities $312.9 million; the reported current ratio was 2.98. Long-term debt rose to $740.5 million from $642.9 million, principally alongside increased revolving-facility borrowing. The new $900 million, five-year revolving facility had $142 million drawn and $755 million unused after letters of credit. The leverage ratio was 1.65 against a 3.75 maximum, and the company reported covenant compliance.
- Other changes: The company repurchased 252,383 shares for approximately $94.3 million in total equity, including unsettled purchases; cash paid for repurchases in the quarter was $79.5 million. Shares outstanding fell to 10,938,744 from 11,188,549 at year-end. Foreign-currency translation reduced comprehensive income by $14.3 million.
Outlook, risks, and contingencies
- Management reported limited COVID-19 impact in Q1 but expected a significant decline in shipments in Q2, particularly in the Americas and Europe, and significant effects on 2020 operating performance. It described demand weakness as expected to be short term but said the duration and pace of recovery were uncertain; China had shown signs of recovery.
- Manufacturing and R&D operations continued without interruption, and management reported no significant raw-material sourcing disruption. It expected cash from operations and available borrowing to cover operating needs and planned capital expenditures for at least 12 months.
- Expected 2020 capital spending was $75–$85 million. Management described 1%–2% annual petroleum-additives market growth as its longer-term expectation, with 2020 an exception, and stated a goal of a 10% compounded annual shareholder return over any five-year period; neither is a guarantee of results.
- COVID-19 was identified as a material risk to results, financial position, cash flows, and stock price, depending on pandemic duration and severity, restrictions, customer demand, supply chains, economic recovery, and financial markets.
- Environmental remediation and related accruals were approximately $10 million at March 31, 2020. Management considered itself adequately accrued for known matters but warned that unexpected future costs could have a significant impact. It did not expect pending legal proceedings, individually or collectively, to have a material adverse effect.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020; the allowance for credit losses was not material. Management reported no material change in market risk, effective disclosure controls, or significant change in critical accounting estimates.
Important facts for investors to verify
- Whether Q2 shipment declines and subsequent recovery matched management’s expectations, by region and product line.
- Whether gross and petroleum-additives operating margins remained sustainable as demand, selling prices, raw-material costs, and foreign exchange changed.
- Whether working-capital requirements and customer collections affected operating cash generation and liquidity.
- How debt, revolving-facility usage, leverage, and covenant headroom evolved after quarter-end.
- Actual capital spending versus the $75–$85 million plan, and the effect of buybacks and dividends on cash and shares outstanding.
- Whether environmental remediation estimates or other legal contingencies changed materially.