NewMarket Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. NewMarket’s principal business is petroleum additives; “All other” includes tetraethyl lead operations and certain contract manufacturing.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $560.7 million | $620.4 million | $1,120.3 million | $1,196.9 million |
| Gross profit | $169.7 million | $180.7 million | $351.0 million | $342.7 million |
| Operating profit | $88.9 million | $104.5 million | $188.7 million | $194.6 million |
| Net income | $58.7 million | $66.8 million | $122.7 million | $124.3 million |
| Diluted EPS | $4.72 | $5.24 | $9.86 | $9.66 |
| Cash dividends declared per share | $1.40 | $1.10 | $2.80 | $2.20 |
- Gross margin was approximately 30.3% in Q2 2015 versus 29.1% a year earlier, and 31.3% for the first half versus 28.6%. Lower raw-material costs helped first-half gross profit, while selling-price, shipment-volume, and conversion-cost variances were unfavorable.
- Q2 sales declined 9.6% and first-half sales declined 6.4%. Petroleum additives segment operating profit fell to $94.1 million in Q2 from $109.1 million; first-half segment profit was $199.1 million versus $205.3 million.
- First-half operating cash flow was $123.2 million, up from $84.5 million. Working-capital changes used $18.4 million, compared with $65.7 million used in the prior-year period.
- Cash and cash equivalents were $126.2 million at June 30, 2015, versus $103.0 million at year-end. Current assets were $817.4 million and current liabilities $253.3 million; the reported current ratio was 3.23 to 1.
- Long-term debt was $361.6 million, including $350 million of 4.10% senior notes due 2022 and $12 million outstanding on the revolving facility. The $650 million facility had $635.3 million unused, including the effect of letters of credit. The company reported covenant compliance; leverage and interest coverage ratios were 0.93 and 22.82, respectively.
- First-half capital expenditures were $50.0 million. Cash used for dividends was $34.8 million and for share repurchases was $8.0 million. The company repurchased 21,083 shares in the first half for a total cost of $9.4 million.
Changes and management commentary
- Management said product shipments were substantially unchanged for the first half, despite lower revenue and operating profit. A stronger U.S. dollar was the largest stated contributor to lower petroleum-additives sales: foreign currency reduced sales by $28.1 million in Q2 and $49.3 million for the first half. Lower selling prices and shipment mix/volume also affected revenue.
- Q2 petroleum-additives shipments were down approximately 2.3% year over year; first-half shipments were essentially unchanged. Lower raw-material costs supported first-half gross profit.
- Research, development, and testing expense rose 13.4% in Q2 and 18.1% for the first half, reflecting investment focused mainly on lubricant additives. Management expected R&D expense to increase for full-year 2015 compared with 2014.
- Management expected solid petroleum-additives segment performance in 2015 and industry shipment-demand growth averaging 1% to 2% annually over the foreseeable future. It forecast 2015 capital spending of approximately $100 million to $140 million, including the Singapore manufacturing facility, which it expected to complete in late 2015 and begin commercial production in early 2016.
- The company said operating cash and available revolving credit should cover foreseeable operating needs. It continued to assess acquisitions, dividends, and repurchases as uses of excess cash.
Risks, contingencies, and unusual items
- The company disclosed a U.S. Department of Justice review of certain foreign business activities concerning economic sanctions and anti-corruption laws, as well as certain historical domestic-market conduct. It said it was cooperating and had provided information; the filing does not state an outcome or quantify a potential liability.
- Afton’s voluntary TSCA compliance audit and an EPA inspection of Afton and Ethyl were ongoing. Management did not expect identified findings to have a material adverse effect, but outcomes were uncertain.
- Environmental remediation accruals were approximately $17 million at June 30, 2015. The filing cautions that unexpected future environmental costs could significantly affect financial position, results, or cash flows.
- An interest-rate swap was not designated for hedge accounting. Its fair-value changes flowed through earnings; it generated $1.5 million of Q2 income but a $0.9 million first-half expense. The swap liability was $21.8 million, with $26 million of cash collateral posted.
- Foreign-currency translation reduced first-half other comprehensive income by $7.1 million. Management noted that repatriating certain indefinitely reinvested foreign earnings could result in incremental U.S. tax.
- Management identified risks including raw-material availability and price changes, manufacturing disruptions, competition, customer gains or losses, foreign exchange, regulation, environmental and legal matters, and international operations. It said results for the six-month period are not necessarily indicative of full-year results.
Investor verification priorities
- Check the revenue and profit trend against management’s explanations for currency, pricing, volume, mix, and raw-material costs.
- Track whether increased R&D and planned capital investment translate into product, capacity, and profit growth, including the Singapore facility’s schedule and costs.
- Review developments in the DOJ review, TSCA audit and inspection, and environmental remediation exposure; the filing provides no quantified DOJ or TSCA contingency.
- Assess cash availability and capital allocation, including foreign cash restrictions, dividends, repurchases, and remaining borrowing capacity.
- Monitor the interest-rate swap’s fair value, collateral requirements, and potential earnings volatility.