NewMarket Corporation — Q2 2022 Form 10-Q
Business and period: NewMarket manufactures and sells petroleum additives, principally lubricant and fuel additives, to customers worldwide. This unaudited report covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $723.6 million | $590.7 million | $1,386.2 million | $1,157.3 million |
| Gross profit | $157.5 million | $141.0 million | $312.6 million | $302.8 million |
| Operating profit | $83.6 million | $70.7 million | $166.9 million | $159.2 million |
| Net income | $66.5 million | $52.0 million | $125.8 million | $121.7 million |
| Diluted EPS | $6.54 | $4.75 | $12.28 | $11.13 |
| Dividends declared per share | $2.10 | $1.90 | $4.20 | $3.80 |
Q2 sales increased 22.5% year over year; first-half sales rose 19.8%. Petroleum additives sales grew 22.9% in Q2 and 20.0% for the first half. Higher selling prices were the primary driver; shipment volumes rose 2.6% in Q2 and 2.5% for the first half, while foreign exchange reduced sales. Q2 lubricant-additive shipments increased, but fuel-additive shipments declined.
Petroleum additives operating profit was $91.2 million in Q2, up from $74.2 million, and $178.1 million for the first half, up from $168.3 million. Its operating margin was 12.7% in Q2 2022 and 2021, and 12.9% in the first half of 2022 versus 14.6% in 2021. Cost of goods sold was 78.2% of sales in Q2 and 77.4% for the first half, compared with 76.1% and 73.8%, respectively, a year earlier.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $24.4 million, down from $104.1 million. Working-capital changes used $114.7 million, reflecting higher receivables and inventory, among other movements.
- Investing activities provided $344.3 million, primarily from $372.8 million of proceeds from sales and maturities of marketable securities; all marketable securities were sold. Capital expenditures were $27.8 million.
- Financing activities used $371.7 million, including the $350 million senior-note redemption, $90.8 million of share repurchases and $42.9 million of dividends, partly offset by $121 million of additional revolving-credit borrowings.
- Cash was $79.5 million at June 30, 2022, versus $83.3 million at year-end 2021. The current ratio was 2.60 versus 1.91; reported working capital was $714.3 million.
- Long-term debt was $911.3 million, comprising $392.3 million of 2.70% notes due 2031, $250 million of 3.78% notes due 2029, and $269 million drawn on the revolving facility. The facility had $629 million of unused capacity and matures in March 2025.
- The company reported compliance with debt covenants; its revolving-facility leverage ratio was 2.61 against a stated maximum of 3.75. Long-term debt was 55.8% of total capitalization, down from 59.9% at year-end 2021.
Material changes, outlook and risks
- On March 15, 2022, NewMarket redeemed $350 million of 4.10% notes due December 2022. It recorded a $7.5 million early-extinguishment loss, including a $7.1 million cash premium and $0.4 million write-off of financing costs.
- Management cited rising raw-material and operating costs, supply constraints, transportation and global supply-chain challenges, and a lag between price increases and margin recovery. It expects these conditions to continue challenging segment operating performance through the rest of 2022. Margin recovery and cost control remain priorities; the company aims to return to its historical profit-margin range.
- Management expects the petroleum additives market to grow 1%–2% annually for the foreseeable future and intends to exceed that rate over the long term. It expects 2022 capital spending of $55–$65 million. No specific earnings or revenue guidance was provided.
- The Russia-Ukraine conflict had not materially affected first-half results, according to management; the company was complying with sanctions and monitoring developments. Other stated risks include raw-material availability and prices, facility disruptions, competition, customer concentration changes, foreign exchange, indebtedness, environmental matters and pension-asset performance.
- Environmental remediation and related accruals were approximately $10 million at June 30, 2022. The company says known matters are adequately accrued but warns unexpected costs could significantly affect its financial position, results or cash flows. It does not expect the legal proceedings described to have a material adverse effect.
- Foreign-currency translation reduced first-half comprehensive income by $32.3 million. First-half net income also included the debt-extinguishment loss and a $3.0 million loss on marketable securities.
- The board’s $500 million repurchase authorization runs through December 31, 2024. NewMarket repurchased 289,737 shares for $92.8 million during the first half; approximately $389.0 million remained authorized at June 30.
Important facts for investors to verify
- Whether selling-price increases continue to offset raw-material, operating and supply-chain cost inflation, and how quickly margins recover.
- Whether working-capital requirements and cash conversion improve after the substantial first-half cash use.
- Future borrowing and interest costs on the variable-rate revolver, alongside planned capital spending, dividends and repurchases.
- Developments in environmental matters, foreign-exchange exposure and the Russia-Ukraine situation, as well as any resulting changes to costs or operations.
- Management’s stated market-growth expectations and long-term shareholder-return goal are outlook statements, not assurances of results.