NewMarket Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparison with the corresponding 2022 periods. NewMarket manufactures and sells petroleum additives worldwide. Unless noted otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $667.2 | $696.0 | $2,055.1 | $2,082.2 |
| Gross profit | $201.7 | $148.3 | $595.4 | $460.9 |
| Operating profit | $132.4 | $78.7 | $381.7 | $245.6 |
| Net income | $111.2 | $63.2 | $308.5 | $189.0 |
| Diluted EPS | $11.60 | $6.32 | $32.05 | $18.60 |
| Cash dividends declared per share | $2.25 | $2.10 | $6.60 | $6.30 |
- Sales fell 4.2% in Q3 and 1.3% year to date. Petroleum additives accounted for nearly all revenue; nine-month sales were $2,047.7 versus $2,074.0.
- Profitability improved substantially despite lower sales. Consolidated gross margin was approximately 30.2% in Q3 versus 21.3%, and 29.0% year to date versus 22.1%. Operating margin was approximately 19.8% versus 11.3% in Q3 and 18.6% versus 11.8% year to date.
- Petroleum additives operating profit increased 68% in Q3 to $139.8 and 55% year to date to $404.0. Segment operating margin was 21.1% versus 12.0% in Q3 and 19.7% versus 12.6% year to date. Higher selling prices, including favorable mix, and favorable Q3 raw-material costs helped offset lower shipments and higher operating costs.
- Cash from operations was $405.2 for nine months, compared with $16.0 in 2022; 2023 included a $71.9 benefit from lower working-capital requirements. Capital expenditures were $34.8. Cash increased $33.8 from year-end to $102.6.
- At September 30, current assets were $1,065.6 and current liabilities $332.2; the current ratio was 3.21. Working capital was $733.4.
- Long-term debt declined to $779.4 from $1,003.7 at year-end, primarily reflecting $225.0 of net revolving-credit repayments. Debt was 44.5% of total capitalization versus 56.8%. The company reported a 1.33 leverage ratio and compliance with debt covenants. Its $900 million revolving facility had $136 million drawn and $762 million unused; it matures March 5, 2025.
Changes, outlook, and risks
- Shipment volume for petroleum additives declined 7.7% in Q3 and 13.5% for nine months. Management attributed weakness to global economic conditions and customer inventory rationalization, particularly in Asia Pacific and EMEAI. Higher prices and favorable mix largely offset lower shipments in year-to-date sales.
- Interest expense increased to $30.2 for nine months from $24.9, mainly because of higher average interest rates, partly offset by lower average debt. The 2022 comparison included a $7.5 debt-extinguishment loss; none was recorded in 2023.
- Management expects 2023 operating performance to remain exposed to economic uncertainty, inflation, and raw-material and operating costs. It emphasized cost control and margin recovery. No specific earnings or revenue guidance was provided.
- Management expects 2023 capital spending of $50–$60 million. It estimates long-term annual petroleum-additives market growth of 1%–2% and aims to exceed that rate. Its stated shareholder-return goal is a 10% compounded annual return over any five-year period, defined as EPS growth plus dividend yield; it cautions this may not be achieved each year.
- Risks include shipment and demand weakness, inflation and input costs, supply or facility disruptions, competition, customer concentration or loss, foreign-exchange movements, regulation, cybersecurity, indebtedness, pension-asset performance, and legal or environmental exposures. Environmental remediation-related accruals were approximately $10 million; the filing says unexpected future costs could materially affect results or cash flows. Management does not expect pending legal matters, individually or collectively, to have a material adverse effect.
- Foreign subsidiaries held $100.1 of cash, much of which management intends to use to support foreign operations. Management said operating cash and available borrowing should cover operating needs and planned capital expenditures.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether shipment volumes stabilize and whether pricing and mix can continue to offset lower volumes and cost inflation.
- Whether operating margins recover or remain near recent levels, including the effect of raw-material and operating costs.
- Whether working-capital cash generation is sustainable; the 2023 year-to-date operating cash-flow comparison benefited from working-capital reductions.
- Debt repayment, borrowing costs, covenant headroom, and the March 2025 revolving-facility maturity and refinancing plans.
- Execution of the $50–$60 million capital-spending plan and any changes to the environmental remediation estimates or other contingencies.
- Potential effects of global minimum-tax rules expected to take effect in some jurisdictions in 2024 or 2025; the filing does not quantify a future impact.