NewMarket Corporation — Q1 2022 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2022, compared with the same period in 2021. NewMarket primarily manufactures and sells petroleum additives worldwide, principally to oil companies.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $662.6 million | $566.6 million | +16.9% |
| Gross profit / margin | $155.2 million / 23.4% | $161.8 million / 28.5% | Profit decreased |
| Operating profit | $83.3 million | $88.5 million | -5.9% |
| Net income | $59.3 million | $69.7 million | -14.9% |
| Diluted EPS | $5.75 | $6.38 | -9.9% |
| Operating cash flow | $6.8 million | $49.4 million | Decreased |
Higher selling prices drove most of the sales increase: petroleum additives prices contributed approximately $102.3 million, while shipment volume added $2.2 million and foreign exchange reduced sales by $9.1 million. Petroleum additives shipments rose 2.3%. Higher raw-material and conversion costs outweighed much of the pricing and volume benefit. Petroleum additives operating profit fell 7.6%, to $86.9 million, and its operating margin declined to 13.2% from 16.7%.
Interest and financing expense increased to $9.4 million from $6.3 million. Q1 2022 included a $7.5 million loss on early debt extinguishment. The effective tax rate was 19.3%, compared with 22.0%.
Financial position and capital allocation
At March 31, 2022, cash was $84.6 million and marketable securities were zero; the company had sold all securities during the quarter. Total debt was $841.1 million, versus $1.139 billion at year-end 2021. The company redeemed $350 million of 4.10% notes due December 2022, funded partly by $51 million of additional revolving-credit borrowings. Revolver borrowings were $199 million, with $699 million of capacity unused. The company reported compliance with debt covenants and a leverage ratio of 2.57 against a 3.75 limit.
Current assets were $1.114 billion and current liabilities $411.7 million; the reported current ratio was 2.71, versus 1.91 at year-end. Operating cash flow was reduced by $67.0 million of working-capital use. Investing cash flow of $359.4 million primarily reflected $372.8 million of securities-sale proceeds; capital spending was $12.6 million. Financing cash use included the note redemption, $37.3 million of share repurchases, and $21.6 million of dividends. The quarterly dividend declared was $2.10 per share, compared with $1.90.
Outlook, commentary and risks
Management expects the petroleum additives market to grow approximately 1%–2% annually over the foreseeable future and aims to grow faster over the long term. It expects 2022 capital spending of $65 million–$75 million. No earnings or margin guidance was provided. Management identified margin recovery and cost control as priorities, while noting a lag between price increases and recovery of margins.
Inflation, raw-material price escalation and volatility, supply availability, and supply-chain and transportation disruptions are pressuring performance. The company expects these challenges to continue through the rest of 2022 but could not predict their duration. The Russia-Ukraine conflict had no material financial impact in Q1, according to the filing; the company is complying with sanctions and assessing developments. Management said liquidity and access to capital remain adequate and major capital projects are substantially on plan.
Risks include raw-material availability and cost, production or distribution disruptions, competition, customer concentration or loss, foreign-exchange movements, substantial indebtedness, cybersecurity, and environmental and legal matters. Environmental remediation accruals were approximately $10 million; the company cautioned that unexpected costs could materially affect results or cash flows. Management said existing legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level.
Key facts for investors to verify
- Whether pricing continues to offset raw-material and operating-cost inflation, and how quickly segment margins recover.
- Working-capital trends and operating cash generation after the significant Q1 cash-flow decline.
- Debt, revolving-facility usage, interest expense, and covenant headroom following the note redemption.
- Whether planned 2022 capital spending and share repurchases remain consistent with liquidity and business needs.
- How supply-chain disruptions, currency movements, and the Russia-Ukraine situation affect shipments, costs, and regional demand.
- Potential changes in environmental remediation obligations and other legal contingencies.