NewMarket Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; compared with the corresponding 2016 periods. NewMarket’s principal business is petroleum additives, including lubricant and fuel additives. “All other” includes its tetraethyl lead business and certain contracted manufacturing and services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $547.2 million | $521.8 million | $1,090.0 million | $1,031.7 million |
| Gross profit | $164.9 million | $178.4 million | $335.1 million | $354.0 million |
| Operating profit | $90.5 million | $97.3 million | $184.1 million | $192.7 million |
| Net income | $62.7 million | $64.4 million | $126.7 million | $126.3 million |
| Diluted EPS | $5.29 | $5.43 | $10.69 | $10.65 |
| Operating cash flow | Not separately presented for the quarter | $92.6 million | $188.0 million |
- Sales rose 4.9% in Q2 and 5.7% for the six months. Petroleum additives sales increased 5.4% and 6.1%, respectively, led by higher shipments; lower selling prices and unfavorable currency effects partly offset volume growth.
- Gross profit fell 7.6% in Q2 and 5.3% for the six months. Management attributed the decline primarily to unfavorable raw-material costs and selling prices, partly offset by higher shipments and modestly improved conversion costs. Approximate consolidated gross margins, calculated from reported figures, were 30.1% versus 34.2% in Q2 and 30.7% versus 34.3% for the six months.
- Petroleum additives operating margin was 17.4% in Q2 versus 19.9%, and 17.9% for the six months versus 19.9%. Management said the rolling four-quarter margin of 17.9% was in line with its long-term expectations.
- Interest and financing expense increased to $5.4 million in Q2 and $10.9 million for the six months, reflecting higher average debt and interest rates. The six-month effective tax rate declined to 27.0% from 30.2%, benefiting from a greater share of income in lower-tax foreign jurisdictions.
- Cash and cash equivalents were $278.0 million at June 30, 2017, up $85.9 million from year-end; $263.8 million was held by foreign subsidiaries. Operating cash flow was pressured by a $51.4 million working-capital use. Capital expenditures were $85.2 million for the six months.
- Long-term debt was $628.0 million, up $120.7 million from December 31, 2016. The company issued $250 million of 3.78% senior notes due 2029 and used part of the proceeds to reduce revolving-credit borrowings. It had $26.4 million outstanding on its $650 million revolving facility and $620.0 million of unused capacity. The current ratio was 3.43 to 1.
- Dividends declared were $1.75 per share in Q2 and $3.50 for the six months, compared with $1.60 and $3.20. No share repurchases were reported in first-half 2017.
Material changes and notable events
- Petroleum additives shipment volumes increased approximately 6.4% in Q2 and 10.1% for the six months year over year. Sales growth was concentrated in Asia Pacific and EMEAI; North America and Latin America had small declines.
- All-other sales decreased to $3.0 million in Q2 and $5.8 million for the six months, from $5.7 million and $9.5 million.
- On July 3, 2017, a wholly owned subsidiary acquired approximately 99.5% of Aditivos Mexicanos, S.A. de C.V. for $185 million cash. Purchase-price and acquired-business valuations were still being finalized; management did not expect the final purchase price to differ significantly.
- Foreign-currency translation added $13.0 million to other comprehensive income for the six months, compared with a $10.3 million loss in 2016.
Outlook, risks and contingencies
- Management expected “solid performance” from petroleum additives in 2017 and forecast long-term industry shipment-demand growth of 1%–2% annually, with an ambition to exceed that rate. It stated a goal of a 10% annual shareholder return over any five-year period, defined as EPS growth plus dividends, while noting it may not achieve that return each year.
- 2017 capital spending was expected to exceed the $143 million spent in 2016, including phase two of the Singapore manufacturing facility, expected to be completed in the second half of 2017. Management expected cash from operations and available revolving-credit borrowing to cover operating needs and planned capital expenditures for at least 12 months.
- Environmental remediation, dismantling and decontamination accruals were approximately $15 million at June 30, 2017. The company warned unexpected future costs could significantly affect financial position, results or cash flows. It considered pending legal matters, including EPA Toxic Substances Control Act inspections, not likely to have a material adverse effect, but outcomes are uncertain.
- Risks cited include raw-material availability or sharp price increases, manufacturing or distribution disruptions, competition, customer gains or losses, foreign-exchange movements, overseas operations, regulation, environmental and legal outcomes, cybersecurity, and acquisition integration and realization of expected benefits.
- The company reported compliance with debt covenants. At June 30, its leverage ratio was 1.59 against a maximum of 3.50, and interest coverage was 17.98 against a minimum of 3.00.
- Revenue standard adoption was planned for January 1, 2018, using a cumulative-effect approach; impact was still under evaluation. Lease-standard adoption was planned for 2019 and was also under assessment.
Investor verification priorities
- Track whether shipment growth can offset raw-material costs, pricing pressure and currency effects, and whether petroleum-additives margins recover.
- Verify the final AMSA purchase price, acquired-business valuation, integration costs and contribution to results after the July 3 closing.
- Assess the pace and returns of Singapore and other capital investments against higher planned 2017 spending.
- Evaluate the accessibility and potential tax consequences of foreign-held cash, and monitor working-capital needs and debt levels.
- Monitor environmental remediation estimates and developments in the EPA inspections and other legal proceedings.