NewMarket Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. NewMarket’s business is primarily the manufacture and sale of petroleum additives. Unless otherwise stated, financial amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $622.2 | $512.9 | $1,779.5 | $1,483.2 |
| Gross profit | $138.2 | $166.6 | $441.0 | $444.3 |
| Gross margin | 22.2% | 32.5% | 24.8% | 29.9% |
| Operating profit | $63.1 | $98.8 | $222.4 | $236.2 |
| Net income | $52.0 | $95.8 | $173.7 | $203.7 |
| Diluted EPS | $4.80 | $8.77 | $15.94 | $18.52 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $145.0 | $216.3 |
- Q3 petroleum additives sales rose 21.3% to $619.1 million; nine-month sales increased 19.9% to $1,770.6 million. Higher shipments, selling prices, and favorable currency effects supported sales growth.
- Petroleum additives operating profit fell 29.4% in Q3 to $72.1 million and 3.4% for the nine months to $240.4 million. Segment operating margin was 11.7% in Q3 versus 20.0%, and 13.6% for nine months versus 16.9%.
- Higher raw material costs pressured margins, partly offset by higher prices and shipments. Q3 consolidated cost of goods sold was 77.7% of sales, compared with 67.9% a year earlier; the nine-month ratio was 75.2% versus 70.2%.
- Q3 interest and financing expense was $9.3 million, up from $6.5 million, mainly because of higher debt. Nine-month expense was $24.6 million versus $20.6 million.
- Other income was $7.4 million in Q3 and $19.8 million for nine months, compared with $25.3 million and $39.3 million, respectively. The 2020 periods included a $16.5 million gain on sale of land; 2021 amounts included marketable-security gains and losses.
Financial position and liquidity
- At September 30, 2021, cash and cash equivalents were $59.6 million and marketable securities were $378.9 million. Cash declined $65.6 million from year-end 2020; the company invested in marketable securities beginning in May.
- Current assets were $1,366.9 million and current liabilities $391.4 million; the current ratio was 3.49, up from 2.87 at December 31, 2020. Working capital was $975.5 million.
- Long-term debt was $991.9 million, up from $598.8 million at year-end 2020. The increase primarily reflected issuance of $400 million of 2.70% senior notes due 2031. The company reported a $1 million revolving-credit-facility borrowing and $897 million of unused facility capacity.
- The leverage ratio was 2.66 against a maximum of 3.75, and the company reported compliance with all debt covenants. Debt was 56.2% of total capitalization, versus 44.1% at year-end 2020.
- Nine-month operating cash flow was $145.0 million, including a $98.4 million use of cash for working capital. Investing cash outflow was $445.6 million, primarily net purchases of marketable securities ($381.5 million) and capital expenditures ($64.0 million). Financing cash inflow was $235.7 million.
- Capital spending for full-year 2021 was expected to be $75 million to $85 million. Management said operating cash and available revolver capacity should cover operating needs and planned capital spending for at least the next 12 months.
Capital returns and other developments
- Q3 dividend was increased to $2.10 per share; dividends declared were $5.90 per share for the first nine months, compared with $5.70 a year earlier.
- NewMarket repurchased 292,392 shares in Q3 for approximately $99.5 million, at an average price of $340.16 per share. Approximately $299.1 million remained under the repurchase authorization at September 30, 2021.
- The company held $378.9 million of marketable securities, including $329.1 million in a U.S. government income mutual fund and $49.8 million in corporate bonds. A hypothetical 10% decline in security trading prices would reduce fair value by $38 million.
Outlook, risks, and contingencies
- Management expects ongoing pressure on operating performance from rising costs, raw-material inflation, supply constraints, and challenging transportation networks; it noted that selling-price adjustments had not fully kept pace with cost increases. It did not expect supply-chain disruptions to be long-term but could not predict how conditions would evolve.
- Management expects the petroleum additives market to grow approximately 1% to 2% annually over the foreseeable future and intends to exceed that rate over the long term. No specific earnings or revenue guidance was provided.
- COVID-19 continued to affect demand to a lesser extent than in 2020. Management said facilities had generally operated without interruption and that demand recovery remained dependent on economic conditions.
- Key stated risks include raw-material availability and price spikes, supply and facility disruptions, competition, customer losses, regulation, foreign-exchange movements, cybersecurity, COVID-19 and other extraordinary events, indebtedness, environmental liabilities, and pension-asset performance.
- Environmental remediation and related accruals were approximately $9 million at September 30, 2021. Management believed it was adequately accrued for known matters but warned unexpected future costs could materially affect results, financial position, or cash flows. It said other legal proceedings were not expected to have a material adverse effect.
- Management stated a shareholder-return goal of 10% annual compounded return over any five-year period, defined as EPS growth plus dividend yield; it cautioned that the goal may not be achieved every year.
Most important facts to verify
- Whether selling-price increases can keep pace with raw-material and other cost inflation, and how that affects petroleum additives margins.
- Whether shipment growth and demand recovery persist after comparison against the unusually weak pandemic-affected 2020 periods.
- Use and performance of the substantial marketable-securities portfolio, including its market-price and interest-rate exposure.
- Debt refinancing and repayment plans, covenant headroom, and the implications of debt rising to $991.9 million.
- Execution of the $75 million to $85 million 2021 capital-spending plan and continued adequacy of liquidity amid working-capital demands.
- Environmental remediation developments and any changes to the estimated accruals or other legal contingencies.