NewMarket Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. NewMarket is a specialty chemicals holding company whose principal business is Afton Chemical’s global petroleum additives operations; Ethyl contributes TEL sales and contracted manufacturing and services. Figures below are in U.S. dollars.
Financial performance
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net sales | $2.049 billion | $2.141 billion | Down 4.3%; lower selling prices and unfavorable currency effects outweighed shipment growth. |
| Gross profit / margin | $680.8 million / 33.2% | $679.1 million / 31.7% | Profit increased slightly; lower raw-material costs were the main benefit. |
| Operating profit | $362.7 million | $356.7 million | Up 1.7% consolidated; petroleum additives segment operating profit was $384.9 million, up from $374.9 million. |
| Net income | $243.4 million | $238.6 million | Up 2.0%. |
| Diluted EPS | $20.54 | $19.45 | Up 5.6%. |
| Operating cash flow | $353.4 million | $268.0 million | Increased; 2016 benefited from lower working-capital requirements. |
| Capital expenditures | $142.9 million | $126.5 million | Higher investment in manufacturing and R&D infrastructure. |
| Cash and cash equivalents | $192.2 million | $93.4 million | Nearly all 2016 cash was held by foreign subsidiaries. |
| Long-term debt | $507.3 million | $490.9 million | Debt was 51.2% of total capitalization, versus 55.9% in 2015. |
| Working capital / current ratio | $542.3 million / 2.84 | $504.7 million / 2.91 | Working capital rose; the current ratio declined slightly. |
The petroleum additives operating margin was 18.9%, compared with 17.6% in 2015. Interest and financing expense was $16.8 million; the effective tax rate was 29.1%. The board-declared dividend was $6.40 per share, up from $5.80. NewMarket repurchased 98,867 shares for $35.8 million.
Material changes and business developments
- Petroleum additives sales fell 4.3% to $2.035 billion. Lubricant additives sales decreased to $1.673 billion from $1.741 billion; fuel additives sales decreased to $362.1 million from $384.0 million. Worldwide shipment volume increased about 1.1%.
- Asia Pacific sales increased approximately 8%; sales declined in North America, EMEAI, and Latin America. No customer accounted for 10% or more of sales in 2016 or 2015.
- Cash from operations rose to $353.4 million. The company used cash for $142.9 million of capital spending, $75.8 million of dividends paid, and $35.8 million of share repurchases.
- NewMarket terminated its interest-rate swap in September 2016. It had recorded $4.9 million of realized swap losses in 2016; the instrument was not designated for hedge accounting.
- On January 4, 2017, after year-end, the company issued $250 million of 3.78% senior unsecured notes due 2029. At December 31, 2016, $491 million of the $650 million revolving facility remained unused, net of letters of credit.
Outlook, risks and contingencies
- Management expects solid petroleum additives performance in 2017 and estimates long-term industry shipment demand growth of 1%–2% annually. It aims to outgrow the industry over time and states a shareholder-return goal of 10% annually over any five-year period, defined as EPS growth plus dividends; this is not a yearly guarantee.
- Management expects 2017 capital expenditures to be similar to 2016, including continued construction of phase two of the Singapore facility. R&D spending is expected to remain essentially flat. Management expects operating cash and available credit to cover operating needs and planned capital expenditures for at least 12 months.
- In December 2016, NewMarket agreed to acquire Aditivos Mexicanos, S.A. de C.V. (AMSA) for $182.5 million, subject to Mexican regulatory review; it expected closing in the first half of 2017.
- Key exposures include raw-material cost and supply disruptions, single-site production dependencies, customer and industry concentration, competition and pricing pressure, foreign exchange and international political uncertainty, chemical-site safety and environmental liabilities, cybersecurity, and pension funding and investment-return risk.
- Environmental remediation, dismantling, and decontamination accruals were approximately $16 million at year-end. The company also reported an $11 million premises-asbestos liability, partly offset by a $5 million insurance and other recovery receivable. Management believes pending proceedings will not have a material adverse effect, but notes that environmental costs could exceed estimates.
- The revolving credit facility requires a leverage ratio no greater than 3.50 and interest coverage of at least 3.00; reported year-end ratios were 1.28 and 21.45, respectively. The company reported compliance with its debt covenants.
Important facts for investors to verify
- Whether 2017 and subsequent sales and margins withstand pricing pressure, currency movements, and changes in raw-material costs.
- Completion, purchase price funding, regulatory approval, and expected benefits of the AMSA acquisition.
- Singapore expansion spending, project timing, and returns relative to the elevated 2016 capital-expenditure level.
- Cash accessibility and potential tax consequences: approximately $189 million was held by foreign subsidiaries, and $537 million of foreign earnings was asserted indefinitely reinvested.
- Environmental and asbestos reserve adequacy, TSCA inspection outcomes, and any changes in legal or remediation exposure.
- Debt, liquidity, covenant headroom, and pension sensitivity to investment returns and discount-rate changes.
- Quarterly results were uneven: fourth-quarter 2016 sales were $501.6 million and net income was $45.7 million, versus $479.6 million and $53.9 million, respectively, in fourth-quarter 2015.