NewMarket Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. NewMarket’s business is principally petroleum additives, with smaller real estate development and “all other” operations.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $590.4 million | $578.5 million | $1,153.1 million | $1,086.6 million |
| Operating profit | $96.2 million | $85.1 million | $201.0 million | $163.2 million |
| Net income | $55.3 million | $52.3 million | $121.8 million | $101.8 million |
| Diluted EPS | $4.12 | $3.77 | $9.09 | $7.34 |
- Petroleum additives revenue rose 2.0% in Q2 and 6.2% for six months. Higher selling prices more than offset lower shipments and unfavorable foreign exchange. Shipments were down 7.5% in Q2 and 4.6% for six months year over year.
- Petroleum additives operating profit was $96.9 million in Q2 and $204.1 million for six months, versus $85.6 million and $166.2 million, respectively. Segment operating margins were 16.6% and 17.9%, compared with 14.9% and 15.5%.
- Gross profit was $165.4 million in Q2 and $334.9 million for six months. The filing does not provide a consolidated gross-margin percentage.
- Operating cash flow was $97.5 million for six months, versus $47.2 million a year earlier. Working-capital changes used $49.6 million, mainly reflecting higher receivables and inventory and lower accrued expenses.
- Capital expenditures were $17.0 million; management estimated full-year 2012 capital spending of approximately $40 million.
- At June 30, cash was $49.4 million; total debt, including current maturities, was $189.6 million, down approximately $54.0 million from year-end. The current ratio was 3.41, and unused revolving-credit capacity was $455.6 million. The company reported covenant compliance; leverage and interest coverage ratios were 0.52 and 22.34 against limits of 3.00 maximum and 3.00 minimum.
Changes and significant items
- In March, NewMarket replaced its $300 million revolver with a five-year, unsecured $650 million facility maturing in March 2017. The company used borrowings to redeem $150 million of 7.125% senior notes and repay the $63.5 million Foundry Park I mortgage.
- Debt extinguishment charges were $6.7 million in Q2 and $9.9 million for six months, including redemption costs and accelerated amortization of financing fees. Approximately $5.3 million was a cash charge.
- Interest and financing expense declined to $2.4 million in Q2 and $6.9 million for six months, from $4.7 million and $9.3 million, respectively, due to lower average rates and debt.
- A non-hedge-accounted Goldman Sachs interest-rate swap generated a $5.7 million Q2 loss and $4.0 million six-month loss in earnings. Its June 30 liability was $33.8 million; $38.5 million of cash was posted as collateral.
- Cash dividends declared were $0.75 per share in Q2, versus $0.60 a year earlier. On July 17, 2012, the board authorized a new share-repurchase program of up to $250 million through December 31, 2014; the program is discretionary.
Outlook, risks and contingencies
- Management expected 2012 to be more profitable than 2011 and cited long-term petroleum-additives industry demand growth of 1%–2%. It cautioned that global economic uncertainty was softening demand, flat market growth in 2012 would not be surprising, and second-half shipments might be below first-half levels.
- Management said raw-material costs fluctuated and that recovery of increases through pricing may lag. Key risks include raw-material and transportation availability, supply disruptions, competition, customer losses, foreign exchange, overseas operations, regulation, environmental liabilities, and legal proceedings.
- The Department of Justice was reviewing certain foreign business activities concerning U.S. economic sanctions and anti-corruption laws, as well as historical domestic-market conduct. NewMarket was cooperating and conducting an internal review; the filing does not quantify any potential outcome or liability.
- Environmental remediation accruals totaled approximately $20.6 million at June 30. Management considered known exposures accrued, but noted unexpected costs could materially affect financial position, results, or cash flows. The company also reported routine litigation and Superfund matters, which it did not expect to have a material adverse effect.
- Approximately $45.4 million of cash was held by foreign subsidiaries. Some earnings were treated as indefinitely reinvested; repatriation of those earnings could incur incremental U.S. tax.
- Management said cash from operations and available revolver borrowings should cover operating expenses for the foreseeable future. No specific earnings-per-share or revenue guidance was provided.
Investor facts to verify
- Whether pricing can continue to offset raw-material inflation and lower shipment volumes, particularly given the anticipated softer second half.
- Execution and cost of the new revolving facility, debt reduction, and the effect of variable-rate borrowing and the Goldman Sachs swap, including its collateral requirements.
- Developments in the DOJ review and environmental matters, and whether either results in additional costs or liabilities.
- Actual 2012 capital spending and profitability versus management’s outlook, as well as any repurchases under the new authorization.