NewMarket Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. NewMarket primarily manufactures and sells petroleum additives, including lubricant and fuel additives, worldwide.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $685.1 million | $723.6 million | $1,387.9 million | $1,386.2 million |
| Gross profit | $195.6 million | $157.5 million | $393.7 million | $312.6 million |
| Operating profit | $124.2 million | $83.6 million | $249.3 million | $166.9 million |
| Net income | $99.6 million | $66.5 million | $197.2 million | $125.8 million |
| Diluted EPS | $10.36 | $6.54 | $20.45 | $12.28 |
| Operating cash flow | Not separately provided | Not separately provided | $262.4 million | $24.4 million |
Consolidated gross margin was approximately 28.6% in Q2 2023 versus 21.8% in Q2 2022, and 28.4% for the first six months versus 22.6% in the prior-year period. Petroleum additives operating margin was 19.3% for Q2 (12.7% prior year) and 19.1% for the six months (12.9% prior year). Q2 dividends declared were $2.25 per share; six-month dividends were $4.35.
Financial position and liquidity
- Cash and cash equivalents were $130.9 million at June 30, 2023, up $62.2 million from year-end 2022. Foreign subsidiaries held $127.5 million of the cash balance.
- Long-term debt was $916.2 million, down from $1,003.7 million at December 31, 2022. Debt comprised senior notes and $273 million drawn on the revolving credit facility; $625 million of facility capacity was unused.
- The company reported a 1.70 leverage ratio against a 3.75-to-1.00 covenant limit and said it was compliant with debt covenants.
- Current assets were $1,140.1 million and current liabilities $349.0 million; the current ratio was 3.27. Inventories declined to $537.4 million from $631.4 million at year-end.
- Six-month capital expenditures were $26.0 million. Financing cash outflows included $88.0 million of net revolver repayments, $42.9 million of dividends paid, and $42.9 million of share repurchases.
Changes versus comparable periods
- Q2 sales fell 5.3%, primarily because petroleum-additive shipment volumes declined 16.7%; higher selling prices partly offset the volume and foreign-exchange impacts.
- Six-month sales were essentially flat. Petroleum-additive shipments fell 16.1%, offset by higher prices. Management attributed weaker shipments to customer destocking and global economic weakness.
- Petroleum-additives segment operating profit rose 44.9% in Q2 and 48.3% for the six months. Higher selling prices supported results, partly offset by lower shipments and higher operating and raw-material costs.
- Interest and financing expense increased to $10.3 million in Q2 and $21.0 million for the six months, mainly due to higher average interest rates. The prior-year six-month period included a $7.5 million debt-extinguishment loss; the 2023 period did not.
- Operating cash flow increased substantially year over year, including a $52.5 million benefit from lower working-capital requirements in 2023; the prior-year comparison included significant marketable-security proceeds in investing cash flow.
Outlook, risks, and contingencies
- Management expects 2023 operating performance to remain exposed to economic uncertainty, inflation, and raw-material costs, and says cost control and margin recovery remain priorities. It expects the long-term petroleum-additives market to grow 1%–2% annually and aims to exceed that rate.
- Management expects 2023 capital spending of $50 million–$60 million and says operating cash flow and available revolver capacity should meet operating needs and planned investment. No specific earnings or revenue guidance was provided.
- Key risks include raw-material availability and price volatility, lower demand and customer destocking, production or supply-chain disruptions, competition, foreign-exchange movements, regulation, substantial indebtedness, pension-asset performance, and legal or environmental liabilities.
- Environmental remediation, dismantling, and decontamination accruals were approximately $10 million. The company cautions that unexpected future costs could materially affect its financial position, results, or cash flows. Management believes legal proceedings, individually or collectively, are not expected to have a material adverse effect.
- The company reported no material market-risk changes, no significant changes in critical accounting estimates, and effective disclosure controls. It is monitoring adoption of OECD global minimum tax rules in relevant jurisdictions, with possible effective dates in 2024 or 2025.
Important facts for investors to verify
- Whether shipment volumes and customer destocking improve, and whether price increases can continue to offset lower volumes and currency effects.
- Whether inflation and raw-material costs stabilize and petroleum-additives margins recover as management expects.
- Debt, interest expense, covenant headroom, and access to the $625 million of unused revolving credit capacity.
- Execution and funding of the planned $50 million–$60 million of 2023 capital expenditures, alongside dividends and repurchases.
- Potential changes in environmental remediation costs and the effects of future global minimum tax requirements.