NewMarket Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. NewMarket primarily manufactures and sells petroleum additives globally. Unless stated otherwise, amounts below are in millions of dollars; comparisons are with 2021.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $696.0 | $622.2 | $2,082.2 | $1,779.5 |
| Gross profit | $148.3 | $138.2 | $460.9 | $441.0 |
| Operating profit | $78.7 | $63.1 | $245.6 | $222.4 |
| Net income | $63.2 | $52.0 | $189.0 | $173.7 |
| Diluted EPS | $6.32 | $4.80 | $18.60 | $15.94 |
| Gross margin | 21.3% | 22.2% | 22.1% | 24.8% |
| Operating margin | 11.3% | 10.1% | 11.8% | 12.5% |
Sales increased 11.9% in Q3 and 17.0% for the nine months. Higher selling prices drove the gains, partly offset by lower shipments and unfavorable foreign exchange. Petroleum-additives shipments declined 8.5% in Q3 and 1.3% for the nine-month comparison. The segment’s nine-month operating profit rose 8.6%, but its operating margin declined to 12.6% from 13.6% as higher raw-material and operating costs offset much of the pricing benefit. Q3 segment operating margin was 12.0%, versus 11.7%.
Other key results: nine-month interest and financing expense was $24.9 million, compared with $24.6 million. The company recorded a $7.5 million loss on early debt extinguishment in 2022. The effective tax rate was 21.1% for the nine months, compared with 20.2%.
Cash flow, liquidity, and debt
Operating cash flow was $16.0 million for the first nine months, down from $145.0 million. Management attributed the pressure principally to a $198.6 million use of cash for working-capital changes, including higher receivables and inventory. Capital expenditures were $40.4 million. Investing activities provided $331.7 million, largely from selling marketable securities; the company sold all of its securities during the period.
Cash and cash equivalents were $72.0 million at September 30, 2022, versus $83.3 million at year-end 2021. Working capital was $748.0 million and the current ratio was 2.76, compared with $663.1 million and 1.91, respectively, at year-end.
Total debt was $1,008.5 million, versus $1,139.3 million at December 31, 2021. The company redeemed $350 million of 4.10% notes due December 2022, borrowing an additional $218 million under its revolving facility. Revolver borrowings were $366 million, with $532 million of unused capacity; the facility has $900 million capacity and matures in 2025. The reported leverage ratio was 2.71, and the company said it was in compliance with debt covenants.
For the nine months, NewMarket paid $63.8 million in dividends and spent $150.8 million on share repurchases. It repurchased 499,275 shares for $155.2 million in total. Approximately $326.6 million remained under its $500 million repurchase authorization at September 30.
Outlook, risks, and contingencies
Management expects ongoing challenges from inflation, raw-material price escalation and volatility, supply constraints, and transportation and supply-chain disruption. It described a lag between cost increases and the benefit of selling-price adjustments, and said margin recovery and cost control remain priorities. The company expects the petroleum-additives market to grow approximately 1%–2% annually for the foreseeable future and aims to exceed that rate over the long term. It expects 2022 capital spending of $55 million–$65 million and said available cash and revolver borrowing should support operating needs and planned capital expenditures.
Management said the Russia-Ukraine war had not materially affected results through the first nine months, while noting sanctions compliance and continued assessment of potential effects. Cited risks include raw-material availability and pricing, facility or supply-chain disruptions, competition, customer concentration, foreign-exchange movements, indebtedness, environmental liabilities, and pension-asset performance. Environmental remediation accruals were approximately $10 million; the filing cautions that unexpected future costs could be significant. Management did not expect pending legal proceedings, individually or together, to have a material adverse effect.
Other notable items: foreign-currency translation reduced nine-month comprehensive income by $68.3 million. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. Management’s stated shareholder-return goal is a 10% compounded annual return over any five-year period, defined as EPS growth plus dividend yield; it is not a guarantee.
Most important facts for investors to verify
- Whether selling-price increases continue to offset raw-material, conversion, and supply-chain costs, and whether petroleum-additives margins recover.
- Whether working-capital investment and lower operating cash flow persist; monitor receivables, inventory, and cash conversion.
- Debt levels, revolving-facility usage, interest-rate exposure, and covenant headroom as financing costs and borrowings change.
- Shipment trends by product and region, including the effect of lower volumes and foreign-exchange movements.
- Progress and final costs of planned capital projects, environmental remediation, and the remaining share-repurchase authorization.