NewMarket Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. NewMarket’s business is primarily petroleum additives, including lubricant and fuel additives; “All other” includes its tetraethyl lead business and certain contracted manufacturing and services.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $548.4 million | $516.1 million | $1,638.4 million | $1,547.8 million |
| Gross profit | $160.3 million | $177.4 million | $495.4 million | $531.4 million |
| Operating profit | $82.4 million | $101.8 million | $266.5 million | $294.5 million |
| Net income | $59.8 million | $71.4 million | $186.4 million | $197.8 million |
| Diluted EPS | $5.04 | $6.03 | $15.73 | $16.68 |
- Sales rose 6.3% for Q3 and 5.9% year to date; operating profit fell 19.1% and 9.5%, respectively. Net income declined 16.3% in Q3 and 5.7% year to date.
- Petroleum additives operating margin was 16.1% in Q3 versus 20.8% a year earlier, and 17.3% for the first nine months versus 20.2%. Management said the year-to-date margin was in line with expectations.
- Operating cash flow was $177.8 million for the first nine months, down from $259.5 million. Working-capital changes used $34.9 million, principally reflecting higher receivables and inventory, partly offset by higher payables.
- Capital expenditures were $121.0 million; acquisition spending was $183.9 million, net of cash acquired. Cash and equivalents were $105.0 million at September 30, down from $192.2 million at year-end 2016.
- Long-term debt was $611.7 million, up from $507.3 million at year-end. The company reported an $850 million revolving facility, $10 million drawn, and $836.5 million unused after letters of credit. Current ratio was 2.74, compared with 2.84 at year-end.
- Dividends declared were $1.75 per share for Q3 and $5.25 for the first nine months, versus $1.60 and $4.80 in 2016.
Material changes and business developments
- Petroleum additives sales increased, primarily from higher shipments: worldwide shipment volume rose approximately 4.7% in Q3 and 8.3% year to date. Lower selling prices partly offset volume growth; currency effects were favorable in Q3 and unfavorable year to date.
- Management attributed weaker gross profit and operating margins mainly to higher raw-material costs and unfavorable selling prices/product mix, with unfavorable conversion costs also contributing. U.S. hurricanes and planned plant shutdowns affected Q3 conversion costs.
- On July 3, 2017, NewMarket acquired approximately 99.5% of Aditivos Mexicanos, S.A. de C.V. (AMSA) for $185 million cash. Preliminary accounting included $115 million of goodwill and $22 million of identifiable intangibles; the purchase-price allocation remained subject to adjustment. AMSA’s results were included from the acquisition date and were not material to consolidated results.
- NewMarket issued $250 million of 3.78% senior notes due 2029 and entered a new five-year, $850 million revolving credit agreement maturing in 2022. It reported compliance with debt covenants; leverage and interest-coverage ratios were 1.56 and 16.07, respectively, against limits of no more than 3.50 and no less than 3.00.
Outlook, risks and contingencies
- Management expected solid petroleum-additives performance in 2017 and estimated long-term industry shipment-demand growth of 1%–2% annually, with an aim to outperform the industry over time. It did not provide specific earnings or revenue guidance.
- Management expected 2017 capital spending to exceed 2016’s $143 million, including the second phase of the Singapore facility and other manufacturing and R&D improvements. The Singapore project was expected to be completed in the second half of 2017.
- Management expected operating cash and available revolving-credit borrowings to cover operating needs and planned capital expenditures for at least the next twelve months. It also stated that it would continue to assess acquisitions, dividends, and share repurchases as uses of cash.
- Key stated risks include raw-material availability and price increases, manufacturing or distribution disruptions, competition, customer losses, foreign-exchange movements, international operations, regulatory changes, environmental liabilities, and acquisition integration and benefit realization.
- Environmental remediation and related accruals were approximately $14 million at September 30, 2017. The company noted that unexpected future environmental costs could significantly affect financial position, results, or cash flows. It did not expect the identified legal proceedings, individually or collectively, to have a material adverse effect.
- Revenue-recognition standard adoption was planned for January 1, 2018, using a cumulative-effect approach; its financial impact was still under evaluation. Management expected the new pension-cost presentation standard to change operating-profit presentation but not net income.
Important facts for investors to verify
- Whether selling prices and raw-material costs improved enough after Q3 to stabilize or restore petroleum-additives margins.
- The final AMSA purchase-price allocation, acquired-business performance, and realization of expected supply and other synergies.
- Actual operating cash flow, inventory and receivables trends, capital spending, and completion/cost of the Singapore expansion.
- Debt, covenant headroom, and liquidity after acquisition funding and planned investment.
- Developments in environmental remediation matters and the eventual impact of the new accounting standards.