NewMarket Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial comparisons are with the three months ended March 31, 2017, unless otherwise noted. NewMarket’s business is primarily petroleum additives, with a smaller “All other” category that includes TEL and certain Ethyl operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $589.2 million | $542.8 million | Up 8.6% |
| Gross profit | $156.8 million | $168.8 million | Down $12.0 million |
| Operating profit | $81.6 million | $90.2 million | Down $8.7 million |
| Income before tax | $81.3 million | $88.2 million | Down $6.9 million |
| Income tax expense | $20.7 million | $24.3 million | Effective tax rate: 25.5% vs. 27.5% |
| Net income | $60.6 million | $63.9 million | Down 5.3% |
| Basic and diluted EPS | $5.14 | $5.39 | Down $0.25 |
| Cash dividends declared per share | $1.75 | $1.75 | Unchanged |
Petroleum additives sales rose 8.7% to $586.9 million. Management attributed the increase to higher selling prices, favorable currency translation, and shipments and product mix. Petroleum additives operating profit fell 11.8% to $84.1 million; its operating margin was 14.3%, compared with 17.7%. Management said rising raw-material and conversion costs more than offset pricing and other favorable factors, and pricing actions had not kept pace with raw-material inflation. Consolidated cost of goods sold rose to 73.4% of sales from 68.9%.
Cash flow, balance sheet and liquidity
- Operating cash flow was $10.0 million, versus $34.2 million in Q1 2017. Working-capital changes used $63.7 million, primarily reflecting higher receivables and inventories and lower accrued expenses.
- Capital expenditures were $22.8 million, versus $46.3 million. Management expects 2018 capital spending of $100 million to $120 million.
- Cash and cash equivalents were $72.8 million at March 31, down from $84.2 million at year-end 2017. Foreign subsidiaries held $71.5 million of the quarter-end cash.
- Long-term debt was $624.9 million, up from $602.9 million at year-end, including $22.0 million outstanding on the revolving facility. The facility had $825.3 million of unused capacity. Debt was 48.8% of total capitalization, compared with 50.1% at year-end.
- The company reported a 2.93-to-1 current ratio and $583.5 million of working capital. It was in compliance with debt covenants; the revolving-facility leverage and interest-coverage ratios were 1.60 and 15.46, respectively.
- Cash dividends paid were $20.6 million. The company repurchased 1,600 shares for approximately $0.6 million during the quarter.
Material changes, outlook and risks
- Management expects solid petroleum-additives results for the remainder of 2018 and estimates long-term industry shipment-demand growth of 1% to 2% annually. It did not provide specific earnings or revenue guidance. Margin improvement remains a priority, particularly while raw-material prices remain elevated.
- Management says cash from operations and revolving-credit availability should cover operating needs and planned capital expenditures for at least the next 12 months. The company continues investment in technology, production capability and global infrastructure, including Singapore and Mexico.
- The 2017 acquisition of approximately 99.5% of Mexican additives manufacturer AMSA cost $185 million in cash. Its results were included from the acquisition date and were described as not material. The purchase-price allocation, including $118 million of goodwill, remained preliminary; the goodwill is not tax-deductible in Mexico.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no income impact or retained-earnings adjustment. The comparative period was not adjusted. Adoption of the pension-cost presentation standard changed 2017 operating-profit presentation but did not change 2017 net income.
- The lower 2018 effective tax rate primarily reflects U.S. tax reform. The company was still evaluating certain tax-reform effects, including GILTI and deferred-tax balances; final adjustments to provisional tax amounts were expected no later than Q4 2018.
- Environmental remediation, dismantling and decontamination accruals were approximately $13 million. Management believes known matters are adequately accrued but cautions that unexpected future costs could significantly affect results, financial position or cash flows. It did not expect the disclosed legal proceedings, including TSCA matters, to have a material adverse effect.
- Other disclosed risks include raw-material availability and price increases, manufacturing or distribution disruptions, competition, customer concentration, foreign-exchange movements, regulation, environmental liabilities, cybersecurity and acquisition integration. Management reported no material change in market risk and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether selling-price actions and other measures are improving margins enough to offset raw-material and conversion-cost pressures.
- Whether working-capital needs, especially receivables and inventories, moderate and operating cash flow supports the planned $100 million to $120 million of capital spending.
- Final purchase accounting for AMSA and any effect on goodwill, acquired intangibles or future results.
- Final tax-reform calculations and the company’s deferred-tax and GILTI policy determinations.
- Progress and potential cost changes for environmental matters, and ongoing compliance with debt covenants.