NewMarket Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. NewMarket primarily manufactures and sells petroleum additives globally. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $590.7 | $410.9 | $1,157.3 | $970.3 |
| Gross profit | $141.0 | $96.7 | $302.8 | $277.6 |
| Gross margin | 23.9% | 23.5% | 26.2% | 28.6% |
| Operating profit | $70.7 | $27.8 | $159.2 | $137.4 |
| Net income | $52.0 | $22.3 | $121.7 | $107.9 |
| Diluted EPS | $4.75 | $2.05 | $11.13 | $9.78 |
| Cash dividends declared per share | $1.90 | $1.90 | $3.80 | $3.80 |
Q2 sales rose 43.8% and six-month sales rose 19.3% year over year. Consolidated operating margin was 12.0% for Q2 (6.8% in 2020) and 13.8% for the first six months (14.2% in 2020). Petroleum additives operating profit increased 14.7% for the first six months, while its margin declined to 14.6% from 15.2%.
Q2 petroleum additives sales increased 43.5%; first-half sales increased 19.2%. First-half lubricant additives sales rose to $993.3 million from $807.1 million, while fuel additives sales were nearly unchanged at $158.2 million versus $159.0 million. “All other” operations generated $5.9 million in first-half sales and a $0.6 million operating loss.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $104.1 million, versus $94.3 million in 2020. Working capital used $59.5 million, primarily as receivables and inventory increased; the company also noted somewhat slower customer payments.
- Capital expenditures were $44.4 million. Investing cash outflow was $422.2 million, chiefly reflecting $377.8 million of net purchases of marketable securities. Financing cash inflow was $346.1 million, including proceeds from new senior notes.
- At June 30, cash and cash equivalents were $153.9 million and marketable securities were $376.3 million. Current assets were $1.423 billion against current liabilities of $372.1 million; the current ratio was 3.83, compared with 2.87 at year-end 2020.
- Long-term debt was $990.6 million, up from $598.8 million at year-end. The company issued $400 million of 2.70% senior notes due 2031; outstanding debt also includes $350 million of 4.10% notes due 2022 and $250 million of 3.78% notes due 2029. No revolving credit facility borrowings were outstanding; $898 million remained unused. The reported leverage ratio was 2.28 against a 3.75 covenant limit, and the company reported compliance with debt covenants.
- Long-term debt was 53.8% of total capitalization, versus 44.1% at year-end. Shareholders’ equity was $849.2 million.
Material changes and management commentary
- Management attributed first-half sales growth mainly to higher lubricant-additive shipments and favorable foreign exchange, partly offset by lower selling prices and lower fuel-additive shipments. Shipment volume increased 19.1% for petroleum additives in the first half; the prior-year comparison was affected by unusually weak Q2 2020 demand during COVID-19 disruptions.
- Higher shipments and favorable conversion costs supported profit, but raw-material costs were significantly unfavorable. Price increases began to benefit Q2 results, but management said their effect lagged rising input costs. First-half petroleum-additives margin therefore fell despite higher segment operating profit.
- In May, the company invested most of the proceeds from its March note issuance in marketable securities. The portfolio included $328.5 million of a U.S. government income mutual fund and $47.8 million of corporate bonds. Unrealized losses on equity securities held at quarter-end were $2.4 million for the period.
- COVID-19 continued to affect results, though less than in 2020. Management reported that facilities generally operated without interruption, while raw-material supply and transportation experienced some disruption. Demand recovery remained dependent on economic conditions and the lifting of government restrictions.
Outlook, risks and contingencies
Management did not provide specific earnings guidance. It expects the petroleum-additives market to grow 1%–2% annually over the foreseeable future and aims to exceed that rate over the long term. The company expects 2021 capital spending of $75 million–$85 million and stated that operating cash and available revolver capacity should cover operating needs and planned capital expenditures for at least the next 12 months. Its stated shareholder-return goal is a 10% compounded annual return over any five-year period, defined as EPS growth plus dividend yield; this is a goal, not a guarantee.
Risks highlighted include raw-material availability and sharp price increases, supply-chain or facility disruptions, competition, customer concentration or loss, regulation, foreign-exchange movements, cybersecurity, COVID-19 and other extraordinary events, substantial indebtedness, pension funding, and environmental or legal matters. Environmental remediation, dismantling and decontamination accruals were approximately $10 million; the filing cautions that unexpected costs could materially affect results or cash flows. Management said it did not expect the disclosed legal proceedings, individually or collectively, to have a material adverse effect.
Market-risk sensitivity disclosures: a hypothetical 100-basis-point decrease in interest rates would change the fair value of debt by $59 million; a hypothetical 10% decline in marketable-security trading prices would reduce their fair value by $38 million.
Important facts for investors to verify
- Whether selling-price increases catch up with rising raw-material costs and how that affects petroleum-additives margins.
- Whether shipment growth and demand recovery persist across regions, especially as COVID-related comparisons normalize.
- Use and performance of the substantial marketable-securities portfolio, including its exposure to market-price changes.
- Debt maturity and refinancing plans, leverage, covenant headroom, and the intended use of proceeds from the 2031 notes; management cited repayment or redemption of 2022 notes and general corporate purposes.
- Execution of planned $75 million–$85 million capital spending and the potential for environmental or other contingencies to exceed recorded accruals.