Business context and reporting period
NewMarket Corporation’s Form 10-K covers the fiscal year ended December 31, 2020. Its principal business is global petroleum additives, primarily through Afton Chemical; “All other” includes Ethyl’s antiknock compounds and contracted services. Results reflect the COVID-19 disruption to transportation, vehicle production and customer demand.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $2.011 billion | $2.190 billion |
| Gross profit / margin | $595.0 million / 29.6% | $629.9 million / 28.8% |
| Operating profit | $311.8 million | $337.3 million |
| Net income | $270.6 million | $254.3 million |
| Diluted EPS | $24.64 | $22.73 |
| Operating cash flow | $284.2 million | $337.2 million |
| Capital expenditures | $93.3 million | $59.4 million |
| Cash and cash equivalents | $125.2 million | $144.4 million |
| Long-term debt | $598.8 million | $642.9 million |
| Working capital / current ratio | $585.6 million / 2.87 | $570.5 million / 2.85 |
Petroleum additives segment sales were $2.002 billion, down 8.0%; segment operating profit fell 7.2% to $333.2 million, while segment operating margin improved to 16.7% from 16.5%. The consolidated effective tax rate was 18.3%, versus 23.3% in 2019. Dividends were $7.60 per share; the company repurchased $101.4 million of stock.
Material changes versus 2019
- Sales declined 8.2%. Petroleum-additive shipment volumes fell 5.2%; lower shipments reduced sales by about $92 million and lower selling prices by about $86 million, partly offset by a $4 million favorable currency impact.
- Operating cash flow decreased by $53 million, including a $54 million cash use from higher working-capital requirements. Capital expenditures increased by about $34 million.
- Net income rose despite lower operating profit, supported in part by lower tax expense and higher other income. Other income included a $16 million gain on the sale of non-operating land.
- Long-term debt declined by about $44 million, primarily after repayment of revolving-credit borrowings. The company ended the year with no revolver borrowings and $898 million of unused facility capacity.
Outlook, risks and unusual items
- Management expects continuing economic and pandemic-related effects on segment performance; demand recovery depends on restrictions and economic conditions. It estimates the petroleum additives market will grow 1%–2% annually over the foreseeable future and aims to exceed that rate over the long term.
- Estimated 2021 capital expenditures are $75 million–$85 million. Management expects operating cash and available borrowing capacity to fund operations and planned investment.
- The company’s stated shareholder-return goal is a 10% compounded annual return over any five-year period, defined as EPS growth plus dividend yield; this is a goal, not a forecast or assurance.
- Key risks include raw-material availability and pricing, customer and industry concentration, competition, single-site production dependencies, foreign-currency and geopolitical exposure, cybersecurity, environmental and legal liabilities, and pension assumptions. More than 65% of 2020 sales were outside the U.S.
- Environmental remediation, dismantling and decontamination accruals were approximately $10 million at year-end. Management believes known matters are adequately accrued, but unexpected costs could be significant. Asbestos claims were accrued at $9 million, with $4 million of related insurance and other recovery receivables.
- Auditors issued unqualified opinions on the financial statements and internal control. Pension-obligation valuation was identified as a critical audit matter, particularly the discount-rate assumption.
Important facts for investors to verify
- Whether sales volumes and selling prices recover, especially in North America and EMEAI, and whether the forecast 1%–2% market growth materializes.
- Whether margin improvement persists as raw-material costs, conversion costs and pricing change.
- Whether cash generation supports the higher capital-investment program, dividends and any further repurchases.
- The company’s ability to refinance or repay the $350 million 4.10% senior notes due in 2022; verify covenant headroom and the stated 1.45 leverage ratio.
- Potential changes in environmental, asbestos and pension obligations, including the sensitivity of pension costs to discount rates and investment returns.