NewMarket Corporation (NYSE: NEU) — Q2 2020 Form 10-Q
Business and period: NewMarket manufactures and sells petroleum additives worldwide, principally lubricant and fuel additives. This unaudited report covers the quarter and six months ended June 30, 2020, compared with the same 2019 periods.
Financial results
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $410.9 million | $563.4 million | $970.3 million | $1,100.0 million |
| Gross profit | $96.7 million | $170.8 million | $277.6 million | $323.7 million |
| Operating profit | $27.8 million | $98.7 million | $137.4 million | $181.5 million |
| Net income | $22.3 million | $74.2 million | $107.9 million | $136.4 million |
| Diluted EPS | $2.05 | $6.63 | $9.78 | $12.20 |
| Gross margin | 23.5% | 30.3% | 28.6% | 29.4% |
| Operating margin | 6.8% | 17.5% | 14.2% | 16.5% |
Margins are calculated from reported sales and profit. Petroleum additives segment operating profit was $33.1 million in Q2 and $146.7 million in the first half; its operating margins were 8.1% and 15.2%, respectively.
- Cash flow: First-half operating cash flow was $94.3 million, down from $150.6 million. Working-capital changes used $60.1 million. Capital expenditures were $40.1 million, making operating cash flow less capital expenditures approximately $54.2 million. Cash declined $42.3 million to $102.1 million.
- Liquidity: Current assets were $790.0 million and current liabilities $234.0 million at June 30; the current ratio was 3.38, versus 2.85 at year-end 2019. The $900 million revolving facility had $806 million unused, net of borrowings and letters of credit.
- Debt: Long-term debt was $690.3 million, up from $642.9 million at year-end. It included $348.6 million of 4.10% notes due 2022, $250 million of 3.78% notes due 2029, and $91.7 million drawn on the revolver. The leverage ratio was 1.83 against a 3.75 maximum covenant; the company reported covenant compliance.
- Capital returns: First-half dividends paid were $41.9 million; dividends declared were $3.80 per share, compared with $3.50. The company repurchased $100 million of shares in the first half. Approximately $400 million remained under its repurchase authorization at June 30.
Changes versus the prior period
Q2 sales fell 27.1% and first-half sales fell 11.8% year over year. Petroleum additives shipments declined 24.4% in Q2 and 9.6% in the first half. Management attributed the contraction primarily to COVID-19-related restrictions, lower travel and miles driven, and reduced industrial activity, including vehicle plant closures. Lower selling prices and unfavorable currency effects also reduced sales. Lower raw-material costs partially offset unfavorable shipment, price, and conversion-cost effects on profit.
First-half petroleum additives operating profit decreased 23.1%. Consolidated Q2 operating profit fell to $27.8 million from $98.7 million, while first-half operating profit declined to $137.4 million from $181.5 million. Interest expense decreased, mainly due to lower average borrowing rates. The effective tax rate was 18.0% in Q2 and 21.4% for the first half, below the comparable 2019 rates.
Outlook, risks, and notable items
- Management said Q2 shipments were down 25.1% from Q1, with May the low point and some improvement in June, particularly in North America and Asia Pacific. It cannot predict the duration or pace of recovery and expects significant operating impacts to continue in the current economic environment.
- The company expects the petroleum additives market to grow 1%–2% annually over the foreseeable future, with 2020 an exception, and intends to exceed that rate over the long term. No specific earnings or revenue forecast was provided.
- Expected 2020 capital spending is $75 million–$85 million. Management said operating cash and available revolver capacity should cover operating needs and planned capital expenditures for at least the next twelve months.
- Management reported that facilities generally continued operating without interruption, raw-material sourcing was not significantly affected, and major capital projects were progressing substantially as planned. It cautioned that pandemic effects depend on government restrictions and broader economic conditions.
- Environmental remediation and related accruals were approximately $10 million at June 30. The filing says unexpected future environmental costs could significantly affect financial position, results, or cash flows, although management believes known matters are adequately accrued. Management did not expect pending legal proceedings, individually or collectively, to have a material adverse effect.
- The company completed the purchase of the remaining outstanding AMSA capital stock in May; the prior noncontrolling interest was described as not material. It adopted the expected-credit-loss accounting standard in January 2020; the related allowance was not material.
Most important facts for investors to verify
- Whether shipments, customer demand, and margins recover from the pandemic-driven Q2 decline, and whether June improvement persisted.
- Whether pricing, product mix, currency, conversion costs, and raw-material savings develop as described by management.
- Cash generation and working-capital needs, alongside the $75 million–$85 million capital-spending expectation and shareholder distributions.
- Debt levels, revolver availability, covenant headroom, and compliance as operating results change.
- Potential exposure beyond recorded environmental accruals and any material developments in legal or pandemic-related risks.