Business context and reporting period
NewMarket Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the first quarter of 2014. Its principal business is petroleum additives, including lubricant and fuel additives; “All other” includes tetraethyl lead operations and certain contract manufacturing.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $559.6 million | $576.4 million; down 2.9% |
| Gross profit / margin | $181.3 million / 32.4% | $161.9 million / 28.1% |
| Operating profit | $99.8 million | $90.2 million |
| Net income | $63.9 million | $57.5 million |
| Diluted EPS | $5.14 | $4.43 |
| Operating cash flow | $56.6 million | $4.4 million |
| Cash and cash equivalents | $119.2 million | $103.0 million at Dec. 31, 2014 |
| Long-term debt | $373.5 million | $363.5 million at Dec. 31, 2014 |
Net sales declined largely because of foreign exchange: the company estimated a $21.2 million unfavorable currency impact in petroleum additives. Petroleum additives shipments increased about 1.5% overall, with lubricant-additive shipments slightly lower and fuel-additive shipments higher. Lower raw-material costs were the primary driver of improved gross profit; cost of goods sold fell to 67.8% of revenue from 72.1%.
Petroleum additives operating profit rose to $105.0 million from $96.2 million, with segment operating margin of 18.9% versus 16.8%. SG&A was $41.8 million, up 5.9%, while research, development and testing expense increased 23.2% to $39.7 million. Net income margin was approximately 11.4%, compared with 10.0%.
Operating cash flow improved year over year and included a $13.8 million use of cash from working-capital changes. Capital expenditures were $20.4 million. Cash dividends paid were $17.4 million; the declared dividend was $1.40 per share versus $1.10. The company repurchased 2,629 shares for approximately $1.0 million. Working capital was $554.2 million and the current ratio was 3.16 at quarter-end. Cash held by foreign subsidiaries was approximately $113.3 million; some earnings are indefinitely reinvested, and repatriation could trigger incremental U.S. tax.
Debt comprised $350 million of 4.10% senior notes due 2022 and $24 million drawn under a $650 million revolving facility, leaving $623.3 million unused after letters of credit. The company reported covenant compliance; leverage and interest coverage ratios were 0.92 and 22.74, respectively. Cash less reported long-term debt was approximately negative $254.3 million.
Outlook, risks and contingencies
Management expects solid petroleum-additives performance in 2015 and industry shipment-demand growth of 1%–2% annually over the foreseeable future; it aims to outgrow the industry over the long term. No specific full-year revenue or earnings forecast was provided. Planned 2015 capital spending is approximately $100 million–$140 million, including a new Singapore manufacturing facility, and management expects R&D spending to increase year over year. Management says operating cash and available revolving credit should fund foreseeable needs.
Management attributed the quarter’s stronger profitability chiefly to lower raw-material costs, while noting continuing investment in talent, technology and global capacity. Risks cited include raw-material availability and price volatility, manufacturing or distribution disruptions, competition, customer concentration changes, foreign exchange, regulatory matters, environmental liabilities and other risks described in the filing.
The company reported ongoing legal and environmental matters, including an EPA TSCA inspection and a Department of Justice review of certain foreign business activities involving economic sanctions and anti-corruption compliance, as well as historical domestic conduct. It said it was cooperating and did not expect identified TSCA findings or legal proceedings to have a material adverse effect, while outcomes remain uncertain. Environmental remediation and related accruals were approximately $18 million. An interest-rate swap liability was $23.3 million; its fair-value loss recognized in earnings was $2.4 million for the quarter. Foreign-currency translation reduced other comprehensive income by $25.7 million.
Most important facts for investors to verify
- Whether shipment growth and improved margins persist if raw-material costs or selling-price and currency effects change.
- Execution, cost and timing of the Singapore facility and the $100 million–$140 million capital-spending plan.
- Developments and potential financial exposure from the DOJ review, EPA TSCA inspection and environmental remediation obligations.
- Availability and tax consequences of foreign cash, including the amount treated as indefinitely reinvested.
- Debt, liquidity and covenant headroom as borrowing, dividends and repurchases evolve.