NewMarket Corporation — Q1 2024 Form 10-Q
Period and business: Unaudited results for the three months ended March 31, 2024, compared with Q1 2023; balance-sheet comparisons are with December 31, 2023. NewMarket primarily manufactures petroleum additives. Results include AMPAC, a specialty materials business serving space-launch and defense programs, from its January 16, 2024 acquisition date.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $696.7 million | $702.8 million | Down 0.9% |
| Gross profit / margin | $216.4 million / 31.1% | $198.0 million / 28.2% | Margin up 2.9 points |
| Operating profit / margin | $140.8 million / 20.2% | $125.0 million / 17.8% | Profit up 12.6% |
| Net income | $107.7 million | $97.6 million | Up 10.4% |
| Diluted EPS | $11.23 | $10.09 | Up 11.3% |
| Operating cash flow | $102.8 million | $109.9 million | Down $7.1 million |
| Capital expenditures | $13.6 million | $11.9 million | |
| Cash dividends declared per share | $2.50 | $2.10 |
Segment trends: Petroleum additives sales fell 3.2% to $677.3 million, as lower selling prices more than offset 4.7% higher shipments. Segment operating profit rose to $150.9 million from $132.1 million, primarily on lower raw-material and operating costs, partly offset by selling prices and product mix. AMPAC contributed $17.0 million in sales and a $5.0 million operating loss; the loss primarily reflected the acquisition-date fair-value step-up on inventory sold after closing.
Financial position, liquidity and debt
- Cash was $117.1 million at March 31, up $5.1 million from year-end. Current assets were $1.119 billion and current liabilities $390.8 million; the reported current ratio was 2.86.
- Long-term debt increased to $1.279 billion from $643.6 million, largely to finance the approximately $700 million AMPAC acquisition. Debt included $386 million drawn on the revolving facility and a $250 million term loan, in addition to $643.8 million of senior notes.
- The new unsecured revolving facility is $900 million, maturing in 2029; $512 million was unused at quarter-end. The term loan matures in 2026 and bears variable-rate interest. The company reported a 1.92 leverage ratio and compliance with debt covenants, which generally cap the ratio at 3.75, subject to agreement terms.
- Operating cash flow included a $21.4 million working-capital use. Investing cash outflow was $697.5 million, including $683.9 million net cash paid for AMPAC. Financing provided $601.4 million, mainly from revolving borrowings and the term loan.
Material changes, outlook and risks
- AMPAC added a new specialty materials segment and substantially increased goodwill and intangibles. The preliminary purchase-price allocation included $258 million of goodwill and $392 million of identified intangibles; valuation and working-capital adjustments remained subject to finalization.
- Interest and financing expense rose to $15.7 million from $10.8 million due to higher average debt and rates. Petroleum additives cost of goods sold declined to 68.4% of sales from 71.7%; its operating margin increased to 22.3% from 18.9%.
- Management expects 2024 capital spending of $50 million to $70 million. It anticipates continued strength in petroleum additives and AMPAC full-year results consistent with pre-acquisition expectations, while cautioning that AMPAC quarterly results may vary substantially. No specific full-year earnings or sales guidance is provided.
- Management cites an uncertain global economy and inflationary pressures on operating costs and raw materials, with cost control and margin recovery priorities. It states that operating cash and available revolver capacity are expected to meet needs and that it does not anticipate covenant issues in the foreseeable future.
- AMPAC’s government-contractor and subcontractor exposure brings risk from appropriations, changing government priorities, funding fluctuations, and contract termination. Other disclosed risks include raw-material availability and price changes, facility disruptions, customer loss, foreign exchange, acquisition integration, substantial debt, and environmental matters. Environmental remediation-related accruals were approximately $11 million.
- The company reported a hypothetical $3.8 million impact on earnings and cash flow if the variable portion of interest rates increased 10%, holding other factors constant. Disclosure controls were deemed effective at a reasonable-assurance level; AMPAC controls were excluded from the evaluation scope during integration.
Investor verification points
- Track final AMPAC purchase accounting and working-capital adjustment, and assess integration results against management’s pre-acquisition expectations.
- Monitor petroleum additives selling prices, shipment volumes, input costs, and margins to determine whether improved profitability is sustainable.
- Review debt balances, variable-rate exposure, interest expense, leverage covenant headroom, and remaining revolver availability.
- Assess cash conversion and working-capital needs alongside the $50 million to $70 million capital-spending outlook and dividend commitments.
- Evaluate AMPAC’s dependence on U.S. government programs and any changes in funding, contract awards, or termination risk; also monitor environmental contingencies and impairment assumptions for acquired goodwill and intangibles.