NewMarket Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. NewMarket’s principal business is petroleum additives. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $508.1 million | $395.1 million | +29% |
| Gross profit | $141.0 million | $120.4 million | +17% |
| Operating profit | $78.1 million | $68.8 million | +14% |
| Net income | $49.6 million | $42.1 million | +18% |
| Diluted EPS | $3.57 | $2.78 | +28% |
| Operating cash flow | $14.3 million | $42.8 million | Down $28.4 million |
- Petroleum additives revenue rose 29% to $502.7 million. Management attributed the increase primarily to 17% higher shipments, including a full quarter of Polartech operations, and higher selling prices; foreign currency impact was essentially flat.
- Petroleum additives operating profit increased to $80.6 million from $70.4 million, while segment operating margin declined to 16.0% from 18.1%. Higher raw-material costs and planned growth-related spending partly offset higher shipments, pricing and Polartech’s contribution.
- Consolidated gross margin was approximately 27.7%, compared with 30.5% a year earlier. SG&A rose 25.7% to $38.4 million; research, development and testing expense rose 16.0% to $24.5 million.
- Interest and financing expense increased to $4.6 million from $3.9 million, primarily due to higher average revolver borrowings. Other expense, net was $0.1 million versus $2.3 million; Q1 2011 included a $0.9 million swap gain offset by a $1.0 million senior-note consent expense.
Cash, liquidity and debt
- Cash was $49.8 million at quarter-end, up $0.6 million from year-end. Working capital was $442.3 million and the current ratio was 3.05, versus $396.4 million and 2.92 at December 31, 2010.
- Operating cash flow fell to $14.3 million, including a $45.6 million cash use from working-capital changes, principally higher receivables and inventory and lower accrued expenses. Capital expenditures were $24.2 million; management estimated 2011 capital spending of $50–$55 million.
- Total debt, including current maturities, was $258.2 million, up $36.3 million from year-end, primarily reflecting $37.0 million of net revolver borrowings. Debt comprised $150 million of 7.125% senior notes due 2016, a $65.6 million Foundry Park I mortgage, $41.0 million under the revolver and $1.6 million on a line of credit.
- The $300 million revolving facility had $253.9 million of unused capacity after borrowings and letters of credit. NewMarket reported compliance with debt covenants; its revolver leverage ratio was 0.83 against a maximum of 3.00.
- Q1 financing included $27.4 million of cash share repurchases. The company repurchased 190,573 shares at an average $126.40; approximately $130.3 million remained under its authorization.
Outlook, risks and unusual items
- Management described demand as strong, businesses as running well, and industry dynamics as unchanged, and said it looked forward to a successful and profitable 2011. It gave no specific earnings or revenue guidance.
- Management expects operating cash and available revolver capacity to cover operating needs for the foreseeable future. It is assessing acquisitions, particularly in petroleum additives, while also considering repurchases and dividends as uses of cash.
- On April 20, 2011, the board declared a quarterly dividend of $0.60 per share, payable July 1—an increase of $0.16, or 36%, from the previous level.
- Environmental remediation accruals were approximately $22.2 million, plus $0.5 million for dismantling and decommissioning. The company said it believed known matters were accrued, but unexpected future costs could materially affect financial position or results. It did not expect pending legal proceedings, individually or collectively, to have a material adverse effect.
- Interest-rate swaps expose earnings and liquidity to valuation and collateral movements. At March 31, the company had posted $20.1 million cash collateral for the Goldman Sachs swap; the disclosed net derivative liability at termination value was $17.6 million. The filing also identifies raw-material and transportation availability, supply disruptions, competition, customer losses, foreign-exchange movements, regulation, environmental matters and acquisition execution as risks.
- Management reported no significant business impact from the March 2011 Japan earthquake and tsunami. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether shipment growth, pricing actions and Polartech’s contribution can offset raw-material inflation and restore petroleum-additives margins.
- Whether working capital converts back into cash after the unusually large Q1 working-capital outflow, and whether capital spending stays within the $50–$55 million estimate.
- How additional borrowing, share repurchases and the higher dividend affect debt levels, liquidity and covenant headroom.
- Developments in environmental remediation estimates and the collateral, valuation and cash demands associated with the interest-rate swaps.
- Whether acquisition opportunities materialize and can be integrated successfully; management’s outlook is qualitative, and the filing cautions that Q1 results are not necessarily indicative of full-year results.