NewMarket Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Unless otherwise stated, amounts below are in U.S. dollars; financial statement figures are in millions.
Business context and results
NewMarket’s business was principally petroleum additives, including lubricant and fuel additives. The company sold its entire real estate development segment on July 2, 2013; that business is presented as discontinued operations.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $580.5 | $551.2 | $1,724.0 | $1,698.6 |
| Gross profit | $163.8 | $160.3 | $501.7 | $491.6 |
| Operating profit | $87.1 | $93.0 | $276.6 | $290.4 |
| Income from continuing operations | $57.0 | $63.8 | $188.3 | $185.0 |
| Net income | $78.9 | $64.7 | $210.7 | $186.5 |
| Diluted EPS | $5.94 | $4.83 | $15.81 | $13.91 |
Q3 sales rose about 5.3%, while nine-month sales increased 1.5%. Petroleum additives shipments increased 6.1% in Q3 and 2.3% over nine months year over year. Lubricant additives revenue grew in both comparisons; fuel additives revenue rose slightly in Q3 but declined over nine months. Lower selling prices and, for the nine-month period, unfavorable currency effects partly offset volume growth.
Profitability, cash flow and balance sheet
- Operating profit declined about 6.3% in Q3 and 4.7% over nine months. Petroleum additives operating profit was $95.5 million in Q3 and $295.3 million for nine months, versus $96.3 million and $300.4 million, respectively. Petroleum additives operating margins were 16.5% in Q3 and 17.2% for nine months, compared with 17.6% and 17.8%.
- Gross margin was approximately 28.2% in Q3 and 29.1% for nine months. R&D expense increased 18.8% in Q3 and 19.4% over nine months; SG&A also increased. Management attributed spending growth to investment in personnel, technology, technical centers and capacity.
- Operating cash flow was $208.4 million for nine months, compared with $185.3 million in 2012. Capital expenditures were $47.2 million. Investing cash flow was $98.8 million, including $140.0 million in net proceeds from the real estate sale; financing cash outflow was $150.1 million.
- Cash was $247.3 million at September 30, 2013, including approximately $134.1 million held by foreign subsidiaries. Working capital was $662.7 million and the current ratio was 3.52 to 1.
- Total debt, including current maturities, was $356.9 million, down $71.9 million from year-end 2012. Debt included $350 million of 4.10% senior notes due 2022 and $7.5 million drawn on a China subsidiary line of credit. The $650 million revolving facility had no borrowings and $646.9 million available, net of letters of credit. The company reported compliance with debt covenants.
- Dividends declared were $0.90 per share in Q3 and $2.70 per share for nine months. The company repurchased $41.2 million of stock during the first nine months.
Material changes and unusual items
- The Foundry Park I property sale generated a $35.8 million pretax gain, or $21.9 million after tax, reported in discontinued operations. This materially lifted reported net income: continuing-operations income declined in Q3 and grew only modestly over nine months.
- Interest and financing expense rose to $4.3 million in Q3 and $13.6 million for nine months, principally reflecting the 2012 issuance of $350 million of 4.10% notes and higher average debt and interest rates.
- Nine-month 2013 other income included a $5.1 million gain on the fair-value change in a non-designated interest rate swap. The swap liability was $22.7 million at quarter-end, with $26.8 million of cash collateral posted.
- In April, NewMarket decided to discontinue production of a fuel additive at its Ethyl Canada facility, recording nonmaterial asset impairment and severance charges. In October it decided to sell the facility and terminate remaining employees; it expected a nonmaterial sale loss and severance charge in Q4.
Outlook, risks and contingencies
- Management expected petroleum additives to deliver improved 2013 results and forecast average annual industry shipment-demand growth of 1%–2% over the next five years. It stated a long-term ambition to outgrow the industry; no precise full-year earnings guidance was provided.
- Management estimated 2013 capital spending of approximately $65 million–$75 million and expected operating cash and available facility borrowings to cover operating needs and planned investment. It continued to consider acquisitions, dividends and repurchases as uses of excess cash.
- The company was cooperating with a U.S. Department of Justice review of certain foreign activities related to sanctions and anti-corruption laws, and certain historical domestic-market conduct. The filing provides no clear estimate of any possible outcome or financial exposure.
- Environmental remediation accruals were approximately $20.0 million, plus $0.4 million for dismantling and decommissioning. Management considered accruals appropriate but cautioned that unexpected future costs could materially affect financial position, results or cash flows. It stated that pending proceedings were not expected to have a material adverse effect.
- Key operating risks include disruption at single-source production facilities, chemical handling and safety hazards, raw-material availability and price changes, competition, customer concentration, foreign exchange, regulation, and environmental or legal outcomes. The filing reported no material change in market risks from the 2012 annual report.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time Foundry Park I sale gain versus recurring petroleum additives performance.
- Whether volume growth can offset lower selling prices, currency movements and rising R&D and SG&A spending while sustaining margins.
- Developments in the DOJ review, environmental matters and the Ethyl Canada facility sale, including any resulting costs or liabilities.
- Cash availability and repatriation: a significant portion of foreign cash was considered indefinitely reinvested, and repatriation could trigger incremental U.S. tax.
- Performance of the interest rate swap and related collateral requirements, and the company’s ongoing capital spending, buybacks, dividends and acquisition plans.