NewMarket Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. NewMarket primarily manufactures and sells petroleum additives. Comparisons are with Q1 2022 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $702.8 million | $662.6 million | Up 6.1% |
| Gross profit | $198.0 million | $155.2 million | Gross margin 28.2%, versus 23.4% |
| Operating profit | $125.0 million | $83.3 million | Operating margin 17.8%, versus 12.6% |
| Net income | $97.6 million | $59.3 million | Up 64.5%; net margin 13.9%, versus 9.0% |
| Diluted EPS | $10.09 | $5.75 | Cash dividend declared: $2.10 per share in both periods |
| Operating cash flow | $109.9 million | $6.8 million | Q1 2023 included $9.8 million from lower working-capital requirements |
| Capital expenditures | $11.9 million | $12.6 million | Company expects $60–$70 million for full-year 2023 |
| Cash and cash equivalents | $70.1 million | $68.7 million at Dec. 31, 2022 | Quarter-end cash increased $1.4 million |
| Long-term debt | $958.0 million | $1,003.7 million at Dec. 31, 2022 | Debt was 53.8% of total capitalization, versus 56.8% |
Business results and changes
- Petroleum additives sales rose 6.0% to $700.0 million. Higher selling prices added approximately $142.1 million, offset by lower lubricant and fuel additive shipments and unfavorable foreign exchange.
- Worldwide petroleum additives shipments declined 15.4%. Management attributed weak shipments in part to a general economic slowdown and customer destocking. Asia Pacific sales decreased; North America and EMEAI contributed most of the year-over-year sales increase.
- Petroleum additives operating profit increased 51.9% to $132.1 million. Its quarterly operating margin was 18.9%, compared with 13.2%; the rolling four-quarter margin was 15.2%, which management described as near the lower end of its long-term expectations.
- Consolidated results also benefited from the absence of the $7.5 million early-debt-extinguishment loss recorded in Q1 2022. Interest and financing expense rose to $10.8 million from $9.4 million, primarily due to higher average interest rates.
- Inventories fell to $566.1 million from $631.4 million at year-end, reflecting planned destocking. Net income and higher foreign-currency translation adjustments contributed to shareholders’ equity increasing to $821.8 million from $762.4 million.
Liquidity, debt, and capital allocation
- Current assets were $1.13 billion and current liabilities were $358.5 million at March 31, 2023; the current ratio was 3.16, versus 2.81 at year-end.
- The $900 million revolving credit facility had $315 million drawn and approximately $583 million of unused capacity at quarter-end. The facility matures March 5, 2025. The reported leverage ratio was 1.91, below the 3.75 maximum; the company stated it was in compliance with debt covenants.
- Financing activities used $97.1 million, including $46.0 million of net revolving-credit repayments, $28.5 million of share repurchases, and $20.3 million of dividends paid.
- NewMarket repurchased 82,486 shares for $28.5 million during the quarter. Approximately $245.9 million remained under the $500 million repurchase authorization, which runs through December 31, 2024.
Outlook, commentary, and risks
- Management expects inflationary pressures, raw-material price volatility, and an uncertain economic environment to affect petroleum additives performance during 2023. It plans to focus on cost control and margin recovery; it did not provide specific full-year earnings or sales guidance.
- The company expects the petroleum additives market to grow 1%–2% annually over the long term and states its goal is a 10% compounded annual shareholder return over any five-year period, defined as EPS growth plus dividend yield. Neither is a guarantee of results.
- Management expects operating cash and available revolving-credit borrowings to cover operating needs and planned capital expenditures. It said major capital projects were progressing substantially as planned.
- Key disclosed risks include raw-material availability and price increases, production or distribution disruptions, lower demand and customer losses, competition, regulation, foreign exchange, substantial indebtedness, cybersecurity or IT failures, environmental liabilities, legal proceedings, and pension-asset underperformance.
- Environmental remediation, dismantling, and decontamination accruals were approximately $10 million at quarter-end. The filing warns that unexpected future costs could significantly affect financial results, position, or cash flows, although management believes known matters are adequately accrued. Management stated that legal proceedings, individually or collectively, were not expected to have a material adverse effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Facts investors should verify
- Whether pricing can continue to offset shipment declines, customer destocking, and raw-material and operating-cost inflation.
- Progress toward margin recovery, given the 15.2% rolling four-quarter petroleum additives operating margin and management’s stated focus on cost control.
- Execution and funding of the planned $60–$70 million of 2023 capital spending, and continued availability under the revolving credit facility.
- Future cash returns through dividends and repurchases, including the remaining authorization and debt covenant capacity.
- Developments in environmental matters and other contingencies, and any change in their estimated costs or potential effects.