NewMarket Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context and key financial metrics
NewMarket’s business was led by petroleum additives, which generated $552.0 million of third-quarter revenue and $1.627 billion for the first nine months. Other activities include real estate development and TEL-related operations.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $557.4 | $471.8 | $1,644.0 | $1,336.7 |
| Gross profit | $145.2 | $135.9 | $434.0 | $388.5 |
| Operating profit | $120.9 | $77.5 | $284.1 | $220.2 |
| Net income | $71.4 | $45.7 | $173.2 | $127.7 |
| Diluted EPS | $5.22 | $3.18 | $12.54 | $8.64 |
| Cash from operations | Not provided quarterly | Not provided quarterly | $120.4 | $105.3 |
- Revenue increased 18% in Q3 and 23% year to date. Petroleum additives sales gains reflected higher selling prices and favorable foreign exchange; nine-month shipments also rose 9%, including the full-period contribution from Polartech.
- Gross margin was approximately 26.1% in Q3 and 26.4% year to date, compared with 28.8% and 29.1%, respectively, in 2010. Management cited higher raw-material costs, partly addressed through selling-price increases.
- Operating profit included a $38.7 million net legal-settlement gain. Excluding that gain, operating profit was approximately $82.2 million in Q3 and $245.4 million year to date; the filing reported 2010 operating profit of $77.5 million and $220.2 million.
- SG&A and research, development and testing expenses together rose $5.9 million in Q3 and $23.3 million year to date, reflecting personnel, professional-fee, growth-related and research spending.
- Cash and cash equivalents were $54.5 million at September 30, 2011. Current assets were $717.2 million and current liabilities $238.4 million; the reported current ratio was 3.01. Operating cash flow included a $88.4 million use from working-capital changes and $25 million received from the settlement. Operating cash flow less capital expenditures was approximately $77.6 million.
- Total debt, including current maturities, was $276.0 million, up $54.1 million from year-end 2010; cash less debt was approximately negative $221.6 million. The $300 million revolver had $55 million drawn and $238.6 million unused after letters of credit. The company reported compliance with debt covenants.
- Capital expenditures were $42.8 million for the first nine months; management estimated approximately $50 million for full-year 2011. The company repurchased 659,373 shares for $94.8 million and paid $22.5 million in dividends during the period. The quarterly dividend was raised to $0.75 per share after quarter-end, payable January 1, 2012.
Material changes versus the prior comparable period
- Net income rose 56% in Q3 and 36% year to date; reported diluted EPS increased from $3.18 to $5.22 and from $8.64 to $12.54, respectively. The settlement gain materially contributed to reported operating profit and earnings.
- Petroleum additives operating profit before the settlement gain was $84.1 million in Q3 versus $80.0 million, and $250.2 million year to date versus $227.0 million. Higher selling prices, favorable currency and, year to date, higher shipments supported results; raw-material and operating expenses offset some gains.
- Debt increased, primarily because of additional revolver and subsidiary line-of-credit borrowings. Shareholders’ equity rose to $556.6 million from $491.6 million, while outstanding shares fell to 13.4 million from 14.0 million at year-end 2010.
- Year-to-date capital spending increased to $42.8 million from $25.1 million. Cash from operations rose to $120.4 million from $105.3 million, but working-capital cash use also increased.
Outlook, risks and unusual items
- Management said demand growth slowed in Q3 and expected the lower rate of increase to continue into Q4. It anticipated a “successful and profitable 2011,” but provided no quantified earnings or revenue guidance. Management described the business as generating cash, with debt capacity to support growth, and said acquisitions—primarily in petroleum additives—remain a focus; repurchases and dividends are alternatives while it waits for suitable opportunities.
- The Innospec settlement provides approximately $45 million in cash, stock and a promissory note: $25 million cash was received, approximately $5 million was paid in unregistered shares, and $15 million is payable in three annual $5 million installments beginning September 2012 at 1% interest. The company recognized a $38.7 million net pre-tax gain.
- A non-hedge-accounted Goldman Sachs interest-rate swap produced a $13.0 million Q3 loss and a $16.2 million nine-month loss. Its reported fair-value liability was $30.7 million; total interest-rate-swap liabilities were $34.6 million, with $34.2 million of cash collateral posted. The company reported $34.1 million as the net derivative liability relevant to contingent default features.
- Environmental remediation accruals totaled $22.2 million, plus $0.6 million for dismantling and decommissioning. Management believes known exposures are accrued, but notes unexpected costs could materially affect results, financial position or cash flows. It considered other pending legal proceedings not likely to cause a material adverse effect.
- Disclosed business risks include raw-material availability and price volatility, transportation or supply interruptions, competition, customer gains or losses, foreign-exchange and international operating risks, regulation, environmental liabilities, and acquisition execution and integration. Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operating performance versus the $38.7 million settlement gain, and how settlement installments and stock value are realized.
- Whether selling prices continue to offset raw-material inflation, particularly as management expects slower demand growth in Q4.
- Working-capital trends, inventory and receivables levels, and conversion of operating earnings into cash.
- Debt, covenant headroom, revolver availability, and the potential cash and earnings effects of the interest-rate swap and collateral requirements.
- Future environmental remediation costs, pension contributions, capital spending, and whether planned shareholder returns or acquisitions affect liquidity.