NewMarket Corporation — Q3 2010 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2010; financial comparisons are with Q3 and the first nine months of 2009. NewMarket’s business is primarily petroleum additives, operated through Afton Chemical. The filing also reports real estate development and other operations. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $471.8 | $417.8 | $1,336.7 | $1,125.9 |
| Gross profit | $135.9 | $143.0 | $388.5 | $345.5 |
| Operating profit | $77.5 | $93.7 | $220.2 | $200.9 |
| Net income | $45.7 | $56.7 | $127.7 | $116.0 |
| Diluted EPS | $3.18 | $3.72 | $8.64 | $7.61 |
- Q3 gross, operating, and net margins were approximately 28.8%, 16.4%, and 9.7%, respectively; comparable 2009 margins were 34.2%, 22.4%, and 13.6%. Nine-month margins were approximately 29.1%, 16.5%, and 9.6%, versus 30.7%, 17.8%, and 10.3% in 2009.
- Petroleum additives revenue rose 12% in Q3 and 18% for nine months. Segment operating profit was $80.0 million in Q3, down from $96.3 million, and $227.0 million for nine months, up from $214.0 million. Q3 segment operating margin fell to 17.2% from 23.3%; nine-month margin was 17.2% versus 19.2%.
- Cash from operations was $104.9 million for nine months, down from $194.6 million. Working-capital changes used $61.2 million, compared with a $67.3 million source in 2009. Investing used $85.5 million and financing used $120.0 million.
- Cash and equivalents were $50.3 million at September 30, down $101.5 million from year-end. Current assets were $602.1 million and current liabilities $202.4 million; the current ratio was 2.98, versus 3.05 at year-end. Working capital was $399.8 million.
- Total debt, including current maturities, was $237.3 million, down $12.8 million from December 2009. Debt comprised $150 million of 7.125% senior notes due 2016, a $66.9 million Foundry Park mortgage, $20 million drawn on the revolver, and capital leases. The $150 million revolver had $121.2 million unused capacity after outstanding letters of credit. The company reported compliance with debt covenants.
Material changes versus prior periods
- Revenue growth reflected higher petroleum-additive shipments and selling prices. Q3 shipments increased 6%; nine-month shipments increased 16%. Management said 2009’s first-half shipments had been below normal following the economic downturn.
- Q3 operating profit declined despite higher revenue. Management cited higher raw-material costs, unfavorable product mix, increased supply-chain spending, and an approximately $3.0 million unfavorable currency effect. Price increases had been implemented but were not yet fully reflected in results; management expected their impact during Q4.
- SG&A and research, development, and testing expenses together increased $7.5 million in Q3 and $22.1 million for nine months, primarily reflecting growth-related costs, Polartech, personnel costs, and professional fees.
- In March, Afton acquired Polartech, a metalworking-additives business, for $43.1 million cash. The purchase added facilities and working capital; the company recorded $6 million of identifiable intangibles and $4.2 million of goodwill. Management said pro forma results would not be materially different from reported results.
- The company repurchased $89.0 million of stock during the first nine months and declared dividends of $1.125 per share, versus $0.70 in the comparable 2009 period. Shares outstanding declined to 14.29 million from 15.21 million at year-end.
Outlook, commentary, risks and unusual items
- Management said petroleum-additive demand had recovered to normal market levels, described the first nine months as strong, and expected continued good performance in Q4, subject to normal business fluctuations. No specific earnings or revenue guidance was provided.
- Management estimated 2010 capital spending of $30–$35 million. It identified acquisitions, particularly in industrial lubricant and fuel additives, as its highest priority for cash and borrowing capacity, while also considering repurchases and dividends.
- Management cited raw-material availability and prices, transportation and supply disruptions, competition, customer concentration, foreign exchange, regulation, chemical-industry hazards, and acquisition execution among risks that could affect results.
- A non-hedge-accounted Goldman Sachs interest-rate swap generated a $17.6 million loss in other expense for the first nine months. Derivative liabilities totaled $30.6 million at September 30; $31.9 million of cash collateral was posted. A 50-basis-point adverse parallel shift in the LIBOR curve was estimated to increase the mortgage swap’s fair-value liability by about $1.3 million.
- Environmental remediation accruals were $21.6 million, plus $0.5 million for dismantling and decommissioning. The company said known issues were accrued, while warning unexpected future costs could materially affect financial position or results. It considered pending legal proceedings not likely to have a material adverse effect. Separately, NewMarket and Afton sued Innospec in July, seeking treble damages over alleged bribery that they say excluded their products in Iraq and Indonesia.
- On October 18, 2010, the board declared a quarterly dividend of $0.44 per share, payable January 1, 2011. The 2010 share-repurchase authorization was $200 million, with approximately $190 million remaining at September 30.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Q4 price increases offset raw-material inflation and improve petroleum-additive margins, particularly given Q3’s lower segment profit and margin.
- Whether the lower nine-month operating cash flow reflects temporary working-capital investment and how inventory and receivables subsequently convert to cash.
- Polartech’s post-acquisition contribution, integration costs, and expected returns.
- Liquidity and exposure associated with the Goldman Sachs swap, its collateral requirements, and the remaining derivative liability.
- Future environmental remediation costs, the status and potential outcome of the Innospec litigation, and capacity for planned capital spending, acquisitions, dividends, and repurchases.