NewMarket Corporation — FY2015 Form 10-K
Business and period. NewMarket is a holding company whose principal business is global petroleum additives, conducted mainly through Afton Chemical. Ethyl conducts tetraethyl lead (TEL) sales in North America and contracted manufacturing. This annual report covers the fiscal year ended December 31, 2015; comparisons are primarily with FY2014. Petroleum additives accounted for $2.125 billion of FY2015 revenue, while “All other” contributed $15.8 million.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2.141 billion | $2.335 billion |
| Gross profit / gross margin | $679.1 million / 31.7% | $665.4 million / 28.5% |
| Operating profit / operating margin | $356.7 million / 16.7% | $362.7 million / 15.5% |
| Net income | $238.6 million | $233.3 million |
| Diluted EPS | $19.45 | $18.38 |
| Operating cash flow | $268.0 million | $235.0 million |
| Capital expenditures | $126.5 million | $59.7 million |
| Cash and cash equivalents, year-end | $93.4 million | $103.0 million |
| Long-term debt, year-end | $494.6 million | $363.5 million |
| Working capital / current ratio | $511.1 million / 2.94:1 | $537.5 million / 3.07:1 |
FY2015 revenue declined 8.3%. Management attributed the decrease primarily to lower selling prices and unfavorable foreign currency translation; petroleum additives shipments fell slightly, by just over 1%. Gross profit rose despite lower sales, as lower raw-material costs largely offset unfavorable selling-price and volume effects. Petroleum additives segment operating profit declined $10 million to $374.9 million; its operating margin was 17.6%, compared with 16.6% in 2014. Higher research, development and testing expense—up about $19 million to $158.3 million—was a key pressure on operating profit. The effective tax rate was 29.6%, versus 31.2%.
Fourth-quarter 2015 revenue was $479.6 million, compared with $548.9 million in fourth-quarter 2014; net income was $53.9 million versus $52.1 million, and diluted EPS was $4.50 versus $4.17.
Operating cash flow funded capital spending, dividends and repurchases, alongside $131 million of net revolving-credit borrowings. Dividends paid were $70.8 million; cash repurchases were $194.9 million (the company reported approximately $198 million of repurchases during the year). Cash flow from operations included $26.8 million of pension and postretirement contributions. Approximately $92 million of year-end cash was held by foreign subsidiaries; some foreign earnings were designated indefinitely reinvested.
Debt comprised $349.6 million of 4.10% senior notes due 2022 and $145 million drawn on the $650 million revolving facility, which matures in 2019. The facility had $502.1 million of unused capacity, including the effect of letters of credit. The company reported covenant compliance, with a 1.28 leverage ratio against a maximum of 3.50 and 24.12 interest coverage against a minimum of 3.00. A $22 million interest-rate-swap liability was collateralized with $26.1 million of cash deposits.
Changes, outlook and key considerations
- Investment and capacity: Capital expenditures more than doubled in 2015, largely reflecting investment in manufacturing and R&D infrastructure, including Singapore. Management expected 2016 capital spending to exceed 2015, with Singapore commercial production expected by mid-2016 and the facility’s second phase scheduled for completion in 2017. R&D spending was expected to increase modestly in 2016.
- Outlook: Management expected solid petroleum additives performance in 2016 and estimated long-term industry shipment demand growth of 1%–2% annually. It aims to grow faster than the industry over the long term and stated a shareholder-return goal of 10% annually over any five-year period, defined as EPS growth plus dividends; it noted that this is not necessarily achieved each year.
- Capital returns: The board authorized a new $500 million share-repurchase program through December 31, 2018. About $482.8 million remained available at year-end. Dividends declared were $5.80 per share for 2015, up from $4.70 in 2014; future payments remain at board discretion and subject to debt-agreement restrictions.
- Risks and contingencies: Key exposures include raw-material availability and price volatility, single-source suppliers and facilities, customer and industry concentration, competition, foreign exchange, international operations, environmental and product-related liabilities, and pension funding. No customer exceeded 10% of FY2015 revenue; Shell had represented 11% in each of 2014 and 2013. Environmental accruals were approximately $17 million at year-end, and the company cautioned that unforeseen costs could be significant. Asbestos liabilities were accrued at $11 million, with $6 million of expected insurance and other recoveries.
- Investigations: The company reported cooperation with a U.S. Department of Justice review concerning certain foreign business activities, sanctions and anti-corruption compliance, and historical domestic-market conduct. Afton’s TSCA self-audit and an EPA inspection of Afton and Ethyl were also ongoing. Management did not expect material adverse effects from the matters described, but outcomes were uncertain.
- Other unusual item: The unhedged Goldman Sachs interest-rate swap is marked to fair value through earnings, contributing a $3.2 million loss in 2015. Foreign-currency translation reduced revenue and resulted in a $30.7 million other-comprehensive-income loss.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded those controls were effective as of December 31, 2015.
Most important facts for investors to verify
- Whether the anticipated Singapore start-up and expansion meet schedule, budget and expected customer-demand assumptions, and how this affects 2016 capital spending and cash generation.
- Whether selling prices, product mix, currency movements and raw-material costs continue to affect revenue and margins, particularly amid modest shipment growth.
- How the DOJ review and TSCA audit/inspection resolve, and whether environmental, asbestos or other legal exposures require accrual changes beyond amounts recorded.
- Whether debt, repurchases and dividends remain supportable by operating cash flow while maintaining covenant headroom and funding pension contributions and planned investment.