NewMarket Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019, compared with the three months ended March 31, 2018. NewMarket primarily manufactures and sells petroleum additives to oil companies worldwide.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $536.6 million | $589.2 million | Down 8.9% |
| Gross profit | $152.9 million | $156.8 million | Down 2.5% |
| Gross margin | 28.5% | 26.6% | Up 1.9 percentage points |
| Operating profit | $82.9 million | $81.6 million | Up 1.6% |
| Net income | $62.2 million | $60.6 million | Up 2.7% |
| Diluted EPS | $5.57 | $5.14 | Up 8.4% |
| Operating cash flow | $19.1 million | $10.0 million | Up $9.1 million |
Overall operating margin was 15.4%, versus 13.8% a year earlier. Petroleum additives segment sales fell 9.2% to $532.7 million, while segment operating profit rose 4.4% to $87.9 million; segment operating margin improved to 16.5% from 14.3%. The company declared dividends of $1.75 per share in both periods.
Revenue drivers and material changes
- Petroleum additives sales decreased $54.2 million. Lower lubricant and fuel additives shipments reduced sales by a combined $73.0 million; improved selling prices added $28.1 million, partly offset by an unfavorable foreign-currency impact of $9.3 million.
- Petroleum additives shipment volume declined 12.5%, with lubricant additives shipments down across all regions. Management attributed the sales decline mainly to lower shipments and unfavorable currency.
- Higher selling prices and lower raw-material costs supported segment profit and margins. Lower shipments, increased conversion costs, and currency effects were offsets. Management said margins remain pressured by the lag between raw-material cost increases and selling-price adjustments.
- Interest and financing expense increased to $8.0 million from $5.2 million, primarily due to higher average debt and lower capitalized interest. The effective tax rate declined to 23.0% from 25.5%, primarily reflecting Tax Reform Act provisions.
Cash, liquidity, debt, and investment
- Cash and cash equivalents were $78.2 million at March 31, 2019, including $75.3 million held by foreign subsidiaries. The current ratio was 3.29:1, compared with 3.00:1 at year-end 2018; reported working capital was $596.2 million.
- Operating cash flow of $19.1 million included a $63.4 million use of cash for working capital. Capital expenditures were $10.4 million; management expected full-year 2019 capital spending of $75–$85 million.
- Long-term debt was $782.0 million, up from $771.0 million at December 31, 2018. It included $350 million of 4.10% senior notes due 2022, $250 million of 3.78% notes due 2029, and $184.2 million drawn on the revolving facility. Unused revolving-facility capacity was $663.1 million. The company reported compliance with debt covenants.
- Cash dividends paid were $19.6 million. The company said operating cash and available revolver capacity should cover operating needs and planned capital expenditures for at least the next 12 months.
- Adoption of the new lease standard on January 1, 2019 added approximately $70 million of right-of-use assets and lease liabilities, with no opening retained-earnings adjustment.
Outlook, risks, and contingencies
Management expected another year of solid petroleum additives segment performance in 2019. It forecast long-term industry shipment-demand growth of 1%–2% and said it planned to exceed that rate. The company reiterated its goal of a 10% compounded annual shareholder return over any five-year period, defined as EPS growth plus dividends; it cautioned that it may not achieve that return each year. The filing does not provide specific full-year revenue or earnings guidance.
Risks identified include raw-material availability and price increases, production or distribution disruptions, competition, customer gains or losses, foreign-exchange movements, regulation, international operating conditions, cybersecurity, indebtedness, pension-asset performance, and environmental and legal matters. Brexit continued to create regulatory and logistical uncertainty for European operations, although key manufacturing facilities in the EU were not in the United Kingdom. Environmental remediation accruals were approximately $11 million; the company noted unexpected future costs could materially affect results, financial condition, or cash flows. Management believed ongoing legal proceedings would not have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether shipment volumes recover and selling-price improvements continue to offset raw-material and conversion-cost pressures.
- Whether the $75–$85 million 2019 capital-spending plan and stated cash-flow expectations are maintained.
- Changes in receivables and other working-capital demands, which materially used cash in Q1.
- Debt levels, revolver availability, covenant compliance, and the capacity to sustain dividends and planned investment.
- Developments in environmental remediation obligations, Brexit-related impacts, and other disclosed operational risks.