NewMarket Corporation — Q1 2021 Form 10-Q
Period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. NewMarket’s revenue is primarily from petroleum additives sold globally to oil-company customers.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $566.6 million | $559.4 million | Up 1.3% |
| Gross profit | $161.8 million | $180.9 million | Down 10.6% |
| Operating profit | $88.5 million | $109.7 million | Down 19.3% |
| Net income | $69.7 million | $85.5 million | Down 18.5% |
| Diluted EPS | $6.38 | $7.67 | Down 16.8% |
| Cash dividends declared per share | $1.90 | $1.90 | Unchanged |
Gross margin was approximately 28.5%, compared with 32.3% a year earlier; cost of goods sold rose to 71.3% of sales from 67.7%. Petroleum additives operating profit fell 17.2% to $94.1 million, and its operating margin declined to 16.7% from 20.4%. “All other” reported an operating loss of $0.7 million versus $0.3 million of profit.
Petroleum additives sales increased 1.4% to $564.9 million. Lubricant additives sales rose to $494.6 million from $463.7 million, while fuel additives sales fell to $70.3 million from $93.7 million. Worldwide shipments increased 2.6%; lower selling prices and higher raw-material and conversion costs more than offset shipment growth.
Cash flow, debt and liquidity
- Operating cash flow was $49.4 million, down from $64.5 million. Working-capital changes used $41.4 million, primarily reflecting higher receivables, inventory and payables.
- Capital expenditures were $20.5 million. Management expects 2021 capital spending of $75 million to $85 million.
- Cash and cash equivalents were $522.4 million at March 31, up $397.2 million from year-end 2020. The current ratio was 4.03, versus 2.87 at year-end.
- Long-term debt increased to $990.2 million from $598.8 million. NewMarket issued $400 million of 2.70% senior notes due 2031; proceeds were intended for repayment or redemption of 4.10% notes due 2022 and general corporate purposes. No borrowings were outstanding under the $900 million revolving facility, with $898 million available after letters of credit.
- The company reported compliance with debt covenants. Its revolving-facility leverage ratio was 2.51, against a stated maximum of 3.75, subject to agreement terms.
Outlook, risks and contingencies
- Management expects ongoing, regionally varying effects from the economic environment and COVID-19 restrictions on petroleum additives demand. It expects the market to grow 1%–2% annually over the foreseeable future and aims to exceed that rate over the long term; this is not a specific earnings forecast.
- Management said operations, raw-material sourcing and deliveries had generally continued without significant interruption, and expected cash from operations and available credit to cover operating needs and planned capital expenditures for at least 12 months.
- Key risks identified include raw-material availability and price increases, production or distribution disruptions, competition, customer losses, regulation, foreign exchange, cybersecurity, COVID-19 and other extraordinary events, substantial indebtedness, pension-asset performance, and environmental or legal matters.
- Environmental remediation accruals were approximately $10 million. The company said unexpected future environmental costs could significantly affect results, financial condition or cash flows. It did not expect pending legal proceedings, individually or collectively, to have a material adverse effect.
- Management cited a shareholder goal of a 10% annualized return over any five-year period, defined as EPS growth plus dividend yield, while noting it may not achieve that return each year. No quarterly or full-year EPS guidance was provided.
Important facts for investors to verify
- Whether the new note proceeds are used to repay or redeem the 4.10% notes, and the resulting interest expense and debt profile.
- Whether shipment recovery and pricing can offset elevated raw-material and conversion costs, particularly in fuel additives and regions affected by pandemic restrictions or weather.
- Whether working-capital investment, planned capital spending and dividend payments remain supportable by operating cash generation.
- Developments in environmental matters, customer payment trends, and the company’s ability to remain within debt-covenant limits.