NewMarket Corporation — Q2 2018 Form 10-Q
Business and period: NewMarket manufactures and sells petroleum additives, principally lubricant and fuel additives, worldwide. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. The AMSA acquisition, completed July 3, 2017, is included in results but was described as not material.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $599.0 million | $547.2 million | $1,188.2 million | $1,090.0 million |
| Gross profit | $145.9 million | $163.5 million | $302.6 million | $332.3 million |
| Operating profit | $67.1 million | $87.1 million | $148.7 million | $177.3 million |
| Net income | $52.9 million | $62.7 million | $113.5 million | $126.7 million |
| Diluted EPS | $4.53 | $5.29 | $9.67 | $10.69 |
| Operating cash flow | — | $65.8 million | $92.6 million |
- Sales rose 9.5% in Q2 and 9.0% for the first six months. Petroleum additives sales increased on higher shipments, selling prices, and favorable currency translation.
- Profitability weakened: gross margin was approximately 24.4% in Q2 and 25.5% for the six months, versus 29.9% and 30.5%, respectively, a year earlier. Operating margin was approximately 11.2% and 12.5%, versus 15.9% and 16.3%.
- Management attributed margin pressure primarily to higher raw-material and conversion costs and unfavorable currency effects; pricing actions had not kept pace. Petroleum additives operating profit declined 21.6% in Q2 and 16.6% for the six months.
- Effective tax rates fell to 24.0% in Q2 and 24.8% year to date, from 26.5% and 27.0%, mainly reflecting U.S. tax reform. The lower rates partly offset reduced pretax income.
- Cash from operations declined year over year, including a $74.5 million working-capital use, principally from higher receivables and lower payables and accrued expenses. Capital expenditures were $42.6 million versus $85.2 million.
Balance sheet, liquidity and capital allocation
- At June 30, 2018, cash was $109.8 million; current assets were $892.8 million and current liabilities $280.0 million. Working capital was $612.8 million and the current ratio was 3.19, compared with 2.63 at year-end 2017.
- Long-term debt was $759.8 million, up $156.9 million from December 31, 2017, mainly due to $157.0 million of net revolving-credit borrowings. Debt included $350 million of 4.10% notes due 2022, $250 million of 3.78% notes due 2029, revolver borrowings, and capital leases.
- The $850 million revolving facility had $690.3 million unused. The company reported compliance with debt covenants; its leverage ratio was 2.01 against a maximum of 3.50, and interest coverage was 14.60 against a minimum of 3.00.
- Cash dividends declared were $1.75 per share for Q2 and $3.50 year to date. The company repurchased $123.3 million of stock during the first six months; $295.1 million remained under its repurchase authorization at June 30.
- Foreign subsidiaries held $104.4 million of cash, a significant portion of which was asserted to be indefinitely reinvested. Management said operating cash and available revolver capacity should cover operating needs and planned capital expenditures for at least 12 months.
Outlook, risks and notable items
- No specific full-year earnings or revenue guidance was provided. Management expects long-term petroleum-additives industry shipment demand to grow 1%–2% annually and aims to outgrow the industry. It identified margin improvement as the top near-term priority until raw-material prices stabilize.
- Management expects 2018 capital spending of $80 million–$100 million for manufacturing and R&D infrastructure. It also reiterated a goal of a 10% compounded annual shareholder return over any five-year period, defined as EPS growth plus dividends; this is an objective, not a yearly commitment.
- Key stated risks include raw-material availability and sharp price increases, manufacturing or distribution disruptions, competition, loss of significant customers, foreign-exchange movements, regulatory and environmental matters, cybersecurity, and acquisition integration and execution.
- Environmental remediation and related accruals were approximately $13 million at June 30. The company said unexpected future costs could significantly affect financial position, results, or cash flows, while stating that known legal proceedings were not expected to have a material adverse effect.
- Afton concluded its voluntary TSCA self-audit and notified the EPA on August 1, 2018; an EPA inspection of Afton and Ethyl remained without reported findings or conclusion. Management did not expect the matter to have a material adverse effect.
- The company was still evaluating certain Tax Cuts and Jobs Act provisions, including GILTI and deferred-tax effects; final adjustments or a policy decision were expected no later than Q4 2018. Adoption of ASC 606 did not change income. Lease accounting changes were scheduled for adoption in 2019, with impact still under assessment.
Investor facts to verify
- Whether pricing catches up with raw-material and conversion-cost inflation and margins recover.
- Whether working-capital demands ease and operating cash flow improves.
- Debt and revolver usage, covenant headroom, and the cash impact of ongoing repurchases and dividends.
- Progress on the $80 million–$100 million capital-spending plan and the expected returns from those investments.
- Final tax-reform accounting adjustments and developments in environmental remediation or TSCA matters.