NewMarket Corporation — Q1 2013 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2013, compared with Q1 2012. NewMarket’s principal business is petroleum additives, including lubricant and fuel additives; it also reports real estate development and “all other” activities.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $562.6 million | $562.7 million | Essentially flat |
| Gross profit | $170.2 million | $169.5 million | Up $0.7 million |
| Operating profit | $98.2 million | $104.7 million | Down $6.5 million |
| Income before tax | $93.9 million | $98.8 million | Down $4.9 million |
| Net income | $67.8 million | $66.5 million | Up $1.3 million |
| Diluted EPS | $5.07 | $4.96 | Up $0.11 |
| Operating cash flow | $27.1 million | $63.1 million | Down $36.0 million |
| Capital expenditures | $16.1 million | $7.4 million | Up $8.7 million |
- Consolidated gross margin was approximately 30.3%, compared with 30.1% a year earlier. Petroleum additives operating margin was 18.3%, down from 19.2%; rolling four-quarter segment margin was 16.7%.
- Petroleum additives revenue rose 0.1% to $558.4 million: lubricant additives increased to $452.7 million, while fuel additives declined to $105.7 million. Higher lubricant shipments were largely offset by lower fuel shipments, lower selling prices, and unfavorable net foreign-exchange effects.
- SG&A increased 10.3% to $40.9 million, and research, development, and testing expense rose 11.0% to $31.0 million. Management attributed the increases to workforce, professional and safety/environmental costs, and product-development investment.
- The effective tax rate fell to 27.7% from 32.6%. Q1 2013 benefited from retroactive reinstatement of the 2012 research and development tax credit, as well as the 2013 credit. Q1 2012 included a $3.2 million loss on early debt extinguishment; there was no comparable charge in 2013.
Financial position and liquidity
- At March 31, cash was $64.0 million, down $25.1 million from year-end; approximately $63 million was held by foreign subsidiaries. Working capital was $531.1 million and the current ratio was 3.34:1.
- Cash from operations was reduced by a $55.7 million working-capital outflow, principally reflecting receivables and prepaid expenses, lower accrued expenses, and timing of tax and dividend payments. Investing cash outflow was $14.8 million; financing cash outflow was $33.8 million, including $12.0 million of dividends and $22.5 million of share repurchases.
- Total debt, including current maturities, was $430.6 million, versus $428.8 million at December 31, 2012. Debt included $350 million of 4.10% senior notes due 2022 and $76 million drawn on the $650 million revolving facility. Available revolver capacity, net of borrowings and letters of credit, was $570.9 million.
- The company reported compliance with debt covenants. Its leverage ratio was 1.13 and interest coverage ratio 30.40, against limits of no more than 3.00 and no less than 3.00, respectively.
- Foreign-currency translation reduced Q1 comprehensive income by $18.3 million; total other comprehensive loss was $16.7 million.
Outlook, risks, and notable items
- Management expects petroleum additives results to improve in 2013 and forecasts industry shipment demand growth averaging 1%–2% annually over the next five years, with an aim to exceed industry growth. It assumed modest global economic recovery for 2013, which had not been measurably evident in Q1. No specific full-year earnings guidance was provided.
- Management expects 2013 capital spending of approximately $80 million–$100 million and full-year R&D expense above 2012. It expects operating cash and available revolver capacity to fund foreseeable needs and continues to consider acquisitions, dividends, and repurchases as uses of cash.
- In April 2013, the company decided to discontinue production of a fuel additive at its Ethyl Canada facility. It recorded a $1.5 million reserve in Q1 for asset impairment and contractual severance; additional costs were to be assessed in Q2, and management did not expect the total charge to be material.
- The Department of Justice is reviewing certain foreign business activities concerning U.S. sanctions and anti-corruption compliance, as well as historical domestic-market conduct. NewMarket is cooperating and conducting an internal review. Management stated that legal proceedings, individually and collectively, were not expected to have a material adverse effect.
- Environmental remediation accruals were approximately $19.5 million at March 31, 2013. The filing notes that unexpected future remediation costs could materially affect financial position, results, or cash flows.
- A Goldman Sachs interest-rate swap had a fair-value liability of approximately $29.5 million, supported by $33.8 million of posted cash collateral. The company recognized swap fair-value changes in earnings rather than applying hedge accounting.
Important facts for investors to verify
- Whether petroleum additives shipment growth, pricing, and segment margins support management’s 2013 improvement outlook.
- How working-capital movements affect cash generation and whether capital spending remains within the stated $80 million–$100 million range.
- The ultimate costs and timing of the Ethyl Canada production discontinuation and environmental obligations.
- Developments in the DOJ review and any resulting financial, compliance, or reputational consequences.
- Availability and geographic accessibility of cash: most cash was held by foreign subsidiaries, and repatriation of indefinitely reinvested earnings could trigger additional U.S. tax.