NewMarket Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. NewMarket is a specialty chemicals holding company whose principal business is global petroleum additives, including lubricant and fuel additives; “All other” principally includes North American tetraethyl lead sales and contract manufacturing.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $2,335.4 million | $2,280.4 million | +2.4% |
| Operating profit | $362.7 million | $351.8 million | +3.1% |
| Net income | $233.3 million | $264.7 million | -11.9% |
| Diluted EPS | $18.38 | $19.90 | -7.6% |
| Cash from operations | $235.0 million | $277.9 million | -15.5% |
Gross profit was $665.4 million, with a 28.5% gross margin; operating margin was 15.5%. Petroleum additives operating profit reached a record $385.1 million, up from $375.3 million, and its segment operating margin was 16.6% versus 16.5%. Lubricant additives revenue increased to $1,901.3 million from $1,829.7 million; fuel additives revenue declined to $423.8 million from $441.6 million.
Fourth-quarter 2014 revenue was $548.9 million (down about 1.3% year over year), gross profit $157.5 million (up about 3.9%), net income $52.1 million (down about 3.6%) and diluted EPS $4.17 (versus $4.08).
Full-year net income fell despite higher operating profit, principally because 2013 included a $21.9 million after-tax gain on sale of the discontinued real estate business. Continuing-operations income was $233.3 million in 2014 versus $242.3 million in 2013. The effective tax rate rose to 31.2% from 29.0%; 2013 also benefited from retroactive R&D tax credits.
Operating cash flow included a $55 million use of cash from higher working-capital requirements and $26.5 million of pension and postretirement contributions. Capital expenditures were $59.7 million. Year-end cash was $103.0 million, down from $238.7 million; approximately $100 million was held by foreign subsidiaries. Working capital was $537.5 million and the current ratio was 3.07, compared with $649.7 million and 3.62 in 2013.
Long-term debt was $363.5 million, including $350 million of 4.10% senior notes due 2022 and $14 million drawn on the revolving facility; a China subsidiary also had $3 million outstanding on a short-term line. The $650 million five-year revolving facility had $632.7 million unused, net of borrowings and letters of credit. NewMarket reported covenant compliance, a 0.93 leverage ratio against a 3.50 maximum, and 21.65 interest coverage against a 3.00 minimum. Debt was 46.3% of total capitalization, up from 37.9%, largely reflecting repurchases, dividends and lower equity.
Changes, outlook and material matters
- FY 2014 revenue growth reflected higher lubricant-additive shipments across all regions; total shipments rose 4.2%. Lower selling prices, unfavorable currency effects and a mix-related decline in certain higher-value fuel additives partly offset volume growth.
- Management expects solid petroleum-additives performance in 2015 and industry shipment-demand growth averaging 1%–2% annually over the foreseeable future. It aims to outgrow the industry over the long term, while noting actual results may differ from forward-looking expectations.
- Planned capital expenditures are approximately $140 million in 2015 and approximately $100 million annually in 2016 and 2017. The Singapore facility, with total investment expected to exceed $100 million, is targeted for completion in late 2015 and commercial production in Q1 2016. R&D spending is expected to increase in 2015.
- Management expects cash from operations and available revolver capacity to cover operating needs and planned capital expenditures for at least twelve months. It will continue to assess acquisitions, dividends and share repurchases. In 2014, the company repurchased 664,254 shares for approximately $249 million and declared dividends of $4.70 per share.
- Environmental remediation, dismantling and decontamination accruals were approximately $18 million at year-end; 2014 environmental operating and cleanup spending was $22 million. The company cautions that unexpected future environmental costs could materially affect results, financial position or cash flows. It is a defendant in premises asbestos claims, with a $12 million liability and $7 million expected recovery receivable.
- The Department of Justice was reviewing certain foreign activities concerning sanctions and anti-corruption compliance, along with historical domestic conduct; NewMarket said it cooperated and provided information. EPA TSCA inspections of Afton and Ethyl were also underway. Management did not expect material adverse effects from these matters, but outcomes remain uncertain.
- Other key risks include raw-material supply and price volatility, single-site production for certain products, customer concentration (Shell represented 11% of revenue), foreign-exchange exposure, competition, facility or distribution disruptions, regulation and litigation. A Goldman Sachs interest-rate swap liability was $23.4 million and generated a $7.1 million loss in 2014; fair-value changes are recorded in earnings without hedge accounting.
Important facts for investors to verify
- Whether lubricant-additive shipment growth and product mix can offset fuel-additive weakness, pricing pressure and currency movements.
- Execution, cost and timing of the Singapore project and the substantial increase in planned 2015 capital spending.
- Cash conversion and working-capital trends, including inventory growth, foreign-held cash and the ability to fund distributions and investment.
- Debt, pension funding and equity-return effects: pension funded status deteriorated, and the U.S. plans’ asset allocation is predominantly equities.
- Developments in the DOJ review, TSCA inspections, environmental remediation and asbestos claims, including any changes to accruals or insurance recoveries.
PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective as of December 31, 2014.