NEWMARKET CORP 10-Q

ITEM 1. Financial Statements NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per-share amounts) Three Months Ended March 31, 2022 2021 Net sales $ 662,552 $ 566,615 Cost of goods sold 507,389 404,862 Gross profit 155,163 161,753 Selling, general, and administrative expenses 35,622 36,915 Research, development, and testing expenses 36,251 36,337 Operating profit 83,290 88,501 Interest and financing expenses, net 9,406 6,343 Loss on early extinguishment of debt 7,545 0 Other income (expense), net 7,168 7,212 Income before income tax expense 73,507 89,370 Income tax expense 14,189 19,658 Net income $ 59,318 $ 69,712 Earnings per share - basic and diluted $ 5.75 $ 6.38 Cash dividends declared per share $ 2.10 $ 1.90 See accompanying Notes to Condensed Consolidated Financial Statements 4 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Three Months Ended March 31, 2022 2021 Net income $ 59,318 $ 69,712 Other comprehensive income (loss): Pension plans and other postretirement benefits: Amortization of prior service cost (credit) included in net periodic benefit cost (income), net of income tax expense (benefit) of $( 156 ) in 2022, and $( 159 ) in 2021 ( 496 ) ( 491 ) Actuarial net gain (loss) arising during the period, net of income tax expense (benefit) of $ 7 in 2022, and $( 219 ) in 2021 16 ( 657 ) Amortization of actuarial net loss (gain) included in net periodic benefit cost (income), net of income tax expense (benefit) of $ 175 in 2022, and $ 529 in 2021 539 1,790 Total pension plans and other postretirement benefits 59 642 Foreign currency translation adjustments, net of income tax expense (benefit) of $ 1,131 in 2022, and $( 464 ) in 2021 ( 3,102 ) 467 Other comprehensive income (loss) ( 3,043 ) 1,109 Comprehensive income $ 56,275 $ 70,821 See accompanying Notes to Condensed Consolidated Financial Statements 5 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) March 31, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 84,550 $ 83,304 Marketable securities 0 375,918 Trade and other accounts receivable, less allowance for credit losses 464,510 391,779 Inventories 524,091 498,539 Prepaid expenses and other current assets 41,183 38,633 Total current assets 1,114,334 1,388,173 Property, plant, and equipment, net 671,327 676,770 Intangibles (net of amortization) and goodwill 127,356 127,752 Prepaid pension cost 245,751 242,604 Operating lease right-of-use assets 69,294 68,402 Deferred charges and other assets 53,491 54,735 Total assets $ 2,281,553 $ 2,558,436 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 290,846 $ 246,097 Accrued expenses 73,401 85,103 Dividends payable 16,418 16,648 Income taxes payable 7,781 4,442 Operating lease liabilities 16,174 15,709 Current portion of long-term debt 0 349,434 Other current liabilities 7,079 7,654 Total current liabilities 411,699 725,087 Long-term debt 841,074 789,853 Operating lease liabilities-noncurrent 53,096 52,591 Other noncurrent liabilities 215,594 228,776 Total liabilities 1,521,463 1,796,307 Commitments and contingencies (Note 10) Shareholders’ equity: Common stock and paid-in capital (with no par value; authorized shares - 80,000,000 ; issued and outstanding shares - 10,254,703 at March 31, 2022 and 10,362,722 at December 31, 2021) 0 0 Accumulated other comprehensive loss ( 85,270 ) ( 82,227 ) Retained earnings 845,360 844,356 Total shareholders' equity 760,090 762,129 Total liabilities and shareholders’ equity $ 2,281,553 $ 2,558,436 See accompanying Notes to Condensed Consolidated Financial Statements 6 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (in thousands, except share and per-share amounts) Common Stock and Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Shareholders’ Equity Shares Amount Balance at December 31, 2020 10,921,377 $ 717 $ ( 173,164 ) $ 932,271 $ 759,824 Net income 69,712 69,712 Other comprehensive income (loss) 1,109 1,109 Cash dividends ($ 1.90 per share) ( 20,763 ) ( 20,763 ) Stock-based compensation 6,777 473 473 Balance at March 31, 2021 10,928,154 $ 1,190 $ ( 172,055 ) $ 981,220 $ 810,355 Balance at December 31, 2021 10,362,722 $ 0 $ ( 82,227 ) $ 844,356 $ 762,129 Net income 59,318 59,318 Other comprehensive income (loss) ( 3,043 ) ( 3,043 ) Cash dividends ($ 2.10 per share) ( 21,570 ) ( 21,570 ) Repurchases of common stock ( 115,796 ) ( 597 ) ( 36,750 ) ( 37,347 ) Stock-based compensation 7,777 597 6 603 Balance at March 31, 2022 10,254,703 $ 0 $ ( 85,270 ) $ 845,360 $ 760,090 See accompanying Notes to Condensed Consolidated Financial Statements 7 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2022 2021 Cash and cash equivalents at beginning of year $ 83,304 $ 125,172 Cash flows from operating activities: Net income 59,318 69,712 Adjustments to reconcile net income to cash flows from operating activities: Depreciation and amortization 21,072 20,631 Deferred income tax (benefit) expense ( 12,135 ) 2,455 Loss on early extinguishment of debt 7,545 0 Working capital changes ( 66,987 ) ( 41,421 ) Loss on marketable securities 2,977 0 Cash pension and postretirement contributions ( 2,099 ) ( 2,577 ) Other, net ( 2,910 ) 571 Cash provided from (used in) operating activities 6,781 49,371 Cash flows from investing activities: Capital expenditures ( 12,612 ) ( 20,524 ) Purchases of marketable securities ( 787 ) 0 Proceeds from sales and maturities of marketable securities 372,846 0 Cash provided from (used in) investing activities 359,447 ( 20,524 ) Cash flows from financing activities: Redemption of 4.10 % senior notes ( 350,000 ) 0 Net borrowings under revolving credit facility 51,000 0 Issuance of 2.70 % senior notes 0 395,052 Dividends paid ( 21,570 ) ( 20,763 ) Repurchases of common stock ( 37,347 ) 0 Cash costs of 4.10 % senior notes redemption ( 7,099 ) 0 Debt issuance costs 0 ( 2,932 ) Other, net ( 833 ) ( 1,915 ) Cash provided from (used in) financing activities ( 365,849 ) 369,442 Effect of foreign exchange on cash and cash equivalents 867 ( 1,056 ) Increase in cash and cash equivalents 1,246 397,233 Cash and cash equivalents at end of period $ 84,550 $ 522,405 See accompanying Notes to Condensed Consolidated Financial Statements 8 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Financial Statement Presentation In the opinion of management, the accompanying consolidated financial statements of NewMarket Corporation and its subsidiaries contain all necessary adjustments for the fair presentation of, in all material respects, our consolidated financial position as of March 31, 2022 and December 31, 2021, and our consolidated results of operations, comprehensive income, and changes in shareholders' equity for the three months ended March 31, 2022 and March 31, 2021, and our cash flows for the three months ended March 31, 2022 and March 31, 2021. All adjustments are of a normal, recurring nature, unless otherwise disclosed. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the NewMarket Corporation Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report), as filed with the Securities and Exchange Commission (SEC). The results of operations for the three month period ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. The December 31, 2021 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Unless the context otherwise indicates, all references to “we,” “us,” “our,” the “company,” and “NewMarket” are to NewMarket Corporation and its consolidated subsidiaries. 2. Net Sales Our revenues are primarily derived from the manufacture and sale of petroleum additives products. We sell petroleum additives products across the world to customers located in the North America, Latin America, Asia Pacific, and Europe/Middle East/Africa/India (EMEAI) regions. Our customers primarily consist of global, national, and independent oil companies. Our contracts generally include one performance obligation, which is providing petroleum additives products. The performance obligation is satisfied at a point in time when products are shipped, delivered, or consumed by the customer, depending on the underlying contracts. In limited cases, we collect funds in advance of shipping product to our customers and recognizing the related revenue. These prepayments from customers are recorded as a contract liability to our customer until we recognize the revenue. Some of our contracts include variable consideration in the form of rebates or business development funds. We regularly review both rebates and business development funds and make adjustments when necessary, recognizing the full amount of any adjustment in the period identified. The following table provides information on our net sales by geographic area. Information on net sales by segment is in Note 3. Three Months Ended March 31, (in thousands) 2022 2021 Net sales United States $ 224,688 $ 170,324 China 52,703 73,988 Europe, Middle East, Africa, India 195,987 176,650 Asia Pacific, except China 104,841 82,597 Other foreign 84,333 63,056 Net sales $ 662,552 $ 566,615 9 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Segment Information The tables below show our consolidated segment results. The “All other” category includes the operations of the antiknock compounds business, as well as certain contracted manufacturing and services associated with Ethyl Corporation (Ethyl). Net Sales by Segment Three Months Ended March 31, (in thousands) 2022 2021 Petroleum additives Lubricant additives $ 570,042 $ 494,556 Fuel additives 90,262 70,342 Total 660,304 564,898 All other 2,248 1,717 Net sales $ 662,552 $ 566,615 Segment Operating Profit Three Months Ended March 31, (in thousands) 2022 2021 Petroleum additives $ 86,922 $ 94,071 All other 98 ( 664 ) Segment operating profit 87,020 93,407 Corporate, general, and administrative expenses ( 3,890 ) ( 4,312 ) Interest and financing expenses, net ( 9,406 ) ( 6,343 ) Loss on early extinguishment of debt ( 7,545 ) 0 Other income (expense), net 7,328 6,618 Income before income tax expense $ 73,507 $ 89,370 10 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Pension Plans and Other Postretirement Benefits The table below shows cash contributions made during the three months ended March 31, 2022, as well as the remaining cash contributions we expect to make during the year ending December 31, 2022, for our domestic and foreign pension plans and domestic postretirement benefit plan. (in thousands) Actual Cash Contributions for Three Months Ended March 31, 2022 Expected Remaining Cash Contributions for Year Ending December 31, 2022 Domestic plans Pension benefits $ 620 $ 1,859 Postretirement benefits 365 1,094 Foreign plans Pension benefits 1,114 5,123 The tables below present information on net periodic benefit cost (income) for our domestic and foreign pension plans and domestic postretirement benefit plan. The service cost component of net periodic benefit cost (income) is reflected in cost of goods sold; selling, general, and administrative expenses; or research, development, and testing expenses, according to where other compensation costs arising from services rendered by the pertinent employee are recorded on the Consolidated Statements of Income. The remaining components of net periodic benefit cost (income) are recorded in other income (expense), net on the Consolidated Statements of Income. Domestic Pension Benefits Postretirement Benefits Three Months Ended March 31, (in thousands) 2022 2021 2022 2021 Service cost $ 4,856 $ 4,814 $ 260 $ 250 Interest cost 3,389 3,241 289 292 Expected return on plan assets ( 10,940 ) ( 9,670 ) ( 204 ) ( 233 ) Amortization of prior service cost (credit) 68 68 ( 757 ) ( 757 ) Amortization of actuarial net (gain) loss 536 1,390 8 12 Net periodic benefit cost (income) $ ( 2,091 ) $ ( 157 ) $ ( 404 ) $ ( 436 ) Foreign Pension Benefits Three Months Ended March 31, (in thousands) 2022 2021 Service cost $ 2,360 $ 2,757 Interest cost 1,098 827 Expected return on plan assets ( 2,635 ) ( 2,666 ) Amortization of prior service cost (credit) 37 38 Amortization of actuarial net (gain) loss 169 901 Net periodic benefit cost (income) $ 1,029 $ 1,857 5. Earnings Per Share We had 34,349 shares of nonvested restricted stock at March 31, 2022 and 26,728 shares of nonvested restricted stock at March 31, 2021 that were excluded from the calculation of diluted earnings per share, as their effect on earnings per share would be anti-dilutive. 11 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The nonvested restricted stock is considered a participating security since the restricted stock contains nonforfeitable rights to dividends. As such, we use the two-class method to compute basic and diluted earnings per share for all periods presented since this method yields the most dilutive result. The following table illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share. Three Months Ended March 31, (in thousands, except per-share amounts) 2022 2021 Earnings per share numerator: Net income attributable to common shareholders before allocation of earnings to participating securities $ 59,318 $ 69,712 Earnings allocated to participating securities 175 153 Net income attributable to common shareholders after allocation of earnings to participating securities $ 59,143 $ 69,559 Earnings per share denominator: Weighted-average number of shares of common stock outstanding - basic and diluted 10,290 10,901 Earnings per share - basic and diluted $ 5.75 $ 6.38 6. Marketable Securities During 2021, NewMarket invested in both debt, which was designated as trading, and equity marketable securities. Subsequently, during the first three months of 2022, we sold all of the marketable securities. While held, the marketable securities were recorded on a settlement date basis at estimated fair value and were classified as current assets in the Consolidated Balance Sheets. Gains and losses, as well as the investment income attributable to the debt and equity securities, are reported in Other income (expense), net in the Consolidated Statements of Income. The debt securities had a cost basis of $ 50 million and the equity securities had a cost basis of $ 334 million at December 31, 2021. At March 31, 2022 the cost basis for all marketable securities was zero . The following table provides information on the fair value of the marketable securities, as well as the related level within the fair value hierarchy. The estimated fair value of debt securities was based on reported trades of the debt security adjusted for other observable market data including, but not limited to, benchmark yield curves, market-based quotes of similar assets, and other market-corroborated inputs. The estimated fair value of equity securities was based on actively quoted market prices. December 31, 2021 Fair Value Measurements Using (in thousands) Fair Value Level 1 Level 2 Level 3 Debt securities Corporate bonds $ 48,727 $ 0 $ 48,727 $ 0 Equity securities U.S. government income mutual fund 327,191 327,191 0 0 Total marketable securities $ 375,918 $ 327,191 $ 48,727 $ 0 7. Inventories March 31, December 31, (in thousands) 2022 2021 Finished goods and work-in-process $ 420,356 $ 393,778 Raw materials 85,357 86,856 Stores, supplies, and other 18,378 17,905 $ 524,091 $ 498,539 12 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Intangibles (Net of Amortization) and Goodwill The net carrying amount of intangibles and goodwill was $ 127 million at March 31, 2022 and $ 128 million at December 31, 2021. The gross carrying amount and accumulated amortization of each type of intangible asset and goodwill are presented in the table below. March 31, 2022 December 31, 2021 (in thousands) Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortizing intangible assets Formulas and technology $ 6,200 $ 4,908 $ 6,200 $ 4,650 Contract 2,000 1,050 2,000 1,000 Customer bases 5,440 4,207 5,440 4,160 Goodwill 123,881 123,922 $ 137,521 $ 10,165 $ 137,562 $ 9,810 All of the intangibles relate to the petroleum additives segment. The change in the gross carrying amount between December 31, 2021 and March 31, 2022 is due to foreign currency fluctuation. There is no accumulated goodwill impairment. Amortization expense was (in thousands): Three months ended March 31, 2022 355 Three months ended March 31, 2021 721 Estimated amortization expense for the remainder of 2022, as well as estimated annual amortization expense related to our intangible assets for the next five years, is expected to be (in thousands): 2022 $ 1,068 2023 907 2024 390 2025 390 2026 390 2027 190 We amortize the contract over 10 years; the customer base over 20 years; and formulas and technology over 6 years. 9. Long-term Debt (in thousands) March 31, 2022 December 31, 2021 Senior notes - 2.70 % due 2031 (net of related deferred financing costs) $ 392,074 $ 391,853 Senior notes - 3.78 % due 2029 250,000 250,000 Senior notes - 4.10 % due 2022 (net of related deferred financing costs) 0 349,434 Revolving credit facility 199,000 148,000 841,074 1,139,287 Less: Current maturity of 4.10 % senior notes 0 349,434 $ 841,074 $ 789,853 Senior Notes - The outstanding 2.70 % senior notes, which were issued in 2021, are unsecured with an aggregate principal amount of $ 400 million. The offer and sale of the notes were registered under the Securities Act of 1933, as amended. 13 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The outstanding 3.78 % senior notes are unsecured and were issued in a 2017 private placement with The Prudential Insurance Company of America and certain other purchasers. On March 15, 2022 we redeemed the 4.10 % senior notes at a redemption price of 100 % of the principal amount of $ 350 million plus the accrued and unpaid interest on the notes and the applicable premium as outlined in the Indenture dated December 20, 2012. The 4.10 % senior notes were due December 2022. We recognized a loss of $ 7.5 million on the early extinguishment including cash paid of $ 7.1 million for the premium on the early redemption and a write-off of $ 0.4 million of unamortized deferred financing costs. We were in compliance with all covenants under all issuances of outstanding senior notes as of March 31, 2022 and December 31, 2021. Revolving Credit Facility - The revolving credit facility has a borrowing capacity of $ 900 million, a term of five years , and matures on March 5, 2025. The obligations under the revolving credit facility are unsecured and are fully and unconditionally guaranteed by NewMarket. The average interest rate for borrowings under the credit agreement was 1.8 % during the first three months of 2022 and 1.6 % during the full year of 2021. We were in compliance with all covenants under the revolving credit facility as of March 31, 2022 and December 31, 2021. Outstanding borrowings under the revolving credit facility amounted to $ 199 million at March 31, 2022 and $ 148 million at December 31, 2021. Outstanding letters of credit amounted to approximately $ 2 million at March 31, 2022 and at December 31, 2021. The unused portion of the credit facility amounted to $ 699 million as of March 31, 2022 and $ 750 million at December 31, 2021. 10. Commitments and Contingencies Legal Matters We are involved in legal proceedings that are incidental to our business and may include administrative or judicial actions. Some of these legal proceedings involve governmental authorities and relate to environmental matters. For further information, see Environmental below. While it is not possible to predict or determine with certainty the outcome of any legal proceeding, we believe the outcome of any of these proceedings, or all of them combined, will not result in a material adverse effect on our consolidated results of operations, financial condition, or cash flows. Environmental We are involved in environmental proceedings and potential proceedings relating to soil and groundwater contamination, disposal of hazardous waste, and other environmental matters at several of our current or former facilities, or at third-party sites where we have been designated as a potentially responsible party (PRP). While we believe we are currently adequately accrued for known environmental issues, it is possible that unexpected future costs could have a significant impact on our consolidated financial position, results of operations, and cash flows. Our total accruals for environmental remediation, dismantling, and decontamination were approximately $ 10 million at March 31, 2022 and $ 11 million at December 31, 2021. Of the total accrual, the current portion is included in accrued expenses and the noncurrent portion is included in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Our more significant environmental sites include a former plant site in Louisiana and a Houston, Texas plant site. Together, the amounts accrued on a discounted basis related to these sites represented approximately $ 8 million of the total accrual above at both March 31, 2022 and December 31, 2021, using discount rates ranging from 3 % to 9 % for both periods. The aggregate undiscounted amount for these sites was $ 10 million at both March 31, 2022 and December 31, 2021. 14 Table of Contents NEWMARKET CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss The balances of, and changes in, the components of accumulated other comprehensive loss, net of tax, consist of the following: (in thousands) Pension Plans and Other Postretirement Benefits Foreign Currency Translation Adjustments Accumulated Other Comprehensive (Loss) Income Balance at December 31, 2020 $ ( 92,771 ) $ ( 80,393 ) $ ( 173,164 ) Other comprehensive income (loss) before reclassifications ( 657 ) 467 ( 190 ) Amounts reclassified from accumulated other comprehensive loss (a) 1,299 0 1,299 Other comprehensive income (loss) 642 467 1,109 Balance at March 31, 2021 $ ( 92,129 ) $ ( 79,926 ) $ ( 172,055 ) Balance at December 31, 2021 $ 1,522 $ ( 83,749 ) $ ( 82,227 ) Other comprehensive income (loss) before reclassifications 16 ( 3,102 ) ( 3,086 ) Amounts reclassified from accumulated other comprehensive loss (a) 43 0 43 Other comprehensive income (loss) 59 ( 3,102 ) ( 3,043 ) Balance at March 31, 2022 $ 1,581 $ ( 86,851 ) $ ( 85,270 ) (a) The pension plan and other postretirement benefit components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (income). See Note 4 in this Quarterly Report on Form 10-Q and Note 18 in our 2021 Annual Report for further information. 12. Fair Value Measurements The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets, as well as the fair value, was $ 85 million at March 31, 2022 and $ 83 million at December 31, 2021. The fair value is classified as Level 1 in the fair value hierarchy. No material events occurred during the three months ended March 31, 2022 requiring adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis. Long-term debt – We record the carrying amount of our long-term debt at historical cost, less deferred financing costs related to our publicly traded senior notes. The estimated fair value of our long-term debt is shown in the table below and is based primarily on estimated current rates available to us for debt of the same remaining duration and adjusted for nonperformance risk and credit risk. The estimated fair value of our publicly-traded senior notes included in the table below is based on the last quoted price closest to March 31, 2022. The fair value of our debt instruments are classified as Level 2. March 31, 2022 December 31, 2021 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current maturities $ 841,074 $ 817,137 $ 1,139,287 $ 1,178,066 15 Table of Contents