NewMarket Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; compared with the same 2009 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. NewMarket’s principal business is petroleum additives, with a smaller real estate development segment.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $469.8 | $370.9 | $865.0 | $708.0 |
| Gross profit | $132.2 | $111.4 | $252.6 | $202.5 |
| Operating profit | $73.9 | $61.1 | $142.7 | $107.1 |
| Net income | $39.9 | $30.7 | $82.0 | $59.3 |
| Diluted EPS | $2.69 | $2.01 | $5.47 | $3.89 |
- Q2 revenue rose about 27% and six-month revenue about 22%. Petroleum additives generated $464.9 million of Q2 revenue and $854.3 million for the six months.
- Calculated consolidated gross, operating, and net margins were approximately 28.1%, 15.7%, and 8.5% in Q2, respectively; for the six months, approximately 29.2%, 16.5%, and 9.5%.
- Petroleum additives operating profit increased to $76.6 million in Q2 and $147.0 million for six months, up from $67.6 million and $117.7 million. Segment operating margin was 16.5% in Q2 versus 18.4% a year earlier, but 17.2% for six months versus 16.8%.
- Operating cash flow was $73.2 million for six months, versus $154.7 million in 2009. The filing attributes a $38.9 million working-capital cash use mainly to higher receivables and inventories.
- Capital expenditures were $18.0 million, including Foundry Park I spending; management estimated full-year 2010 capital spending of approximately $40 million.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $46.6 million at June 30, down $105.2 million from year-end. Working capital was $359.2 million, versus $405.1 million at December 31; the current ratio was 2.88 versus 3.05.
- Total debt, including current maturities, was $236.1 million, down approximately $13.9 million from year-end. It included $150 million of 7.125% senior notes due 2016, a $67.6 million Foundry Park I mortgage, and $18.0 million drawn on the revolving facility.
- The $150 million revolver matures December 21, 2011. After $10.3 million of letters of credit, $121.7 million was available. The company reported compliance with debt covenants.
- Six-month financing included $79.2 million of share repurchases and $11.0 million of dividends. The company declared dividends of $0.75 per share for the six months.
- On July 21, 2010, the board authorized a new share repurchase program of up to $200 million through December 31, 2012, replacing the prior program.
Material developments and management commentary
- Afton acquired the Polartech metalworking-additives business on March 5 for $43.7 million cash. The purchase allocation included $6 million of identifiable intangibles, $28.4 million of property and equipment, and $4.2 million of goodwill. Polartech goodwill is not tax deductible.
- Management said petroleum-additive demand had recovered from recessionary effects to pre-recession levels. Shipments rose 21% in both the Q2 and six-month comparisons, with growth predominantly in lubricant additives; Q2 also benefited from Polartech shipments.
- Higher raw-material costs outpaced achieved selling-price increases in Q2, reducing petroleum-additives segment margin. Management said it intended to restore the margin through the marketplace. Six-month selling prices were unfavorable year over year.
- Management expected continued good performance during the rest of 2010, subject to normal business fluctuations. It highlighted GF-5 product-specification transition opportunities and expected shipments from a Far East supply-chain expansion to begin later in 2010. Acquisitions remained the highest priority for cash and borrowing capacity, alongside dividends and repurchases.
- The Foundry Park I mortgage refinanced the $99.1 million construction loan: the new $68.4 million five-year loan is variable-rate, with an interest-rate swap fixing LIBOR at 2.642%. A separate Goldman Sachs swap produced a $12.1 million six-month loss recognized in earnings; the company had $26.8 million of cash collateral posted. The filing reports a $25.5 million net derivative liability for credit-risk-related contingencies.
- Environmental remediation accruals totaled approximately $23.2 million at June 30. Management considered known matters adequately accrued but warned that unexpected future costs could materially affect financial position or results.
- On July 23, Afton and NewMarket filed an antitrust and business-conspiracy complaint against Innospec, seeking treble damages and costs related to alleged bribery that excluded NewMarket products in Iraq and Indonesia. The filing states outcomes of pending proceedings are uncertain and does not expect them, individually or combined, to have a material adverse effect.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether shipment growth and Polartech integration continue to support revenue and earnings, and whether price increases recover the Q2 raw-material-driven margin decline.
- Cash conversion and working-capital trends, given lower operating cash flow and the increase in receivables and inventories.
- Liquidity after the acquisition, buybacks, dividends, and collateral postings; availability and covenant headroom on the revolving facility.
- Potential earnings and liquidity volatility from derivative valuations, collateral requirements, and the $26.8 million Goldman Sachs cash deposit.
- Assumptions underlying environmental liabilities, guarantees, and the Innospec litigation; the filing does not quantify a potential recovery from the lawsuit.
- Execution and returns from the Polartech acquisition, the Far East expansion, and the new $200 million repurchase authorization.